Exploring the causes and consequences of director overboardedness in an emerging market

Nadia Mans-Kemp; Suzette Viviers; Sian Collins

doi:10.1057/s41310-018-0048-9

Exploring the causes and consequences of director overboardedness in an emerging market

Mans-Kemp, Nadia; Viviers, Suzette; Collins, Sian 2018-10-29 00:00:00 Int J Discl Gov (2018) 15:210–220 https://doi.org/10.1057/s41310-018-0048-9 ORIGINAL ARTICLE Exploring the causes and consequences of director overboardedness in an emerging market 1 1 1 • • Nadia Mans-Kemp Suzette Viviers Sian Collins Received: 12 October 2018 / Published online: 29 October 2018 The Author(s) 2018 Abstract Scholars and shareholder activists have raised more complex when individuals serve on multiple direc- concerns about directors serving on multiple boards torates simultaneously (Oehmichen et al. 2017; Kaczmarek simultaneously. Semi-structured interviews were con- et al. 2014). A board of directors is not only responsible for ducted with 10 experienced diverse South African directors setting the company’s strategic direction, but it should also to investigate the causes and consequences of overboard- ensure that managers implement the strategy in an efﬁcient edness. Interviewees identiﬁed the limited talent pool and and ethical manner. board diversity targets as the main causes of overboard- The effectiveness of directors’ monitoring role was edness (or interlocking as it is also called). In line with the questioned after the 2008 global ﬁnancial crisis (Hill and busyness hypothesis, poor meeting attendance by over- McDonnell 2013). Much of the criticism stemmed from boarded directors was highlighted by some participants. shareholders who argued that board members should have However, others claimed that director interlocking could adopted a more active oversight role on their behalf. An offer invaluable access to social networks and resources, increasing number of shareholders and other ﬁnanciers lending support to the experience hypothesis. Director started to interrogate boards and objected to directors who busyness should hence be considered on a case-by-case held multiple board positions, claiming that they might not basis. be able to effectively fulﬁl their manifold roles (Orol 2016; Ferris et al. 2003). The term ‘‘overboardedness’’ refers to Keywords Agency theory Busyness hypothesis Director directors who serve on too many boards at the same time interlocking Director overboardedness Experience (Harris and Shimizu 2004). Although there is not a gen- hypothesis Resource dependence erally accepted guideline for the number of board positions that is likely to result in overboardedness, previous authors suggested that three or more outside (external) board positions could be regarded as excessive (Lee and Lee Introduction 2014; Fich and Shivdasani 2006). Being a director of a public or private company could be Two schools of thought have emerged to explain the regarded as a double-edged sword. The beneﬁts, such as consequences of director overboardedness or interlocking prestige and substantial remuneration, should be weighed as it is also called. The experience hypothesis postulates against the potential for reputational damage, time com- that multiple directorships may result in directors gaining mitments and the duties accompanying each board position invaluable experience and access to vast social networks (Katz and McIntosh 2016). The balancing act becomes and resources (Clements et al. 2015; Carpenter and West- phal 2001). In contrast, the busyness hypothesis suggests that directors might become overcommitted if they serve & Nadia Mans-Kemp on several boards at the same time (Jiraporn et al. 2009b; nadiamans@sun.ac.za Fich and Shivdasani 2006). The main consequences of directors being overextended Department of Business Management, Stellenbosch include insufﬁcient meeting attendance and limited University, Private Bag X1, Matieland 7602, South Africa Exploring the causes and consequences of director overboardedness in an emerging market 211 monitoring ability. The two hypotheses are not necessarily Despite having one of the best developed corporate competing. The disadvantages of busyness might be offset governance frameworks in the world, there are no clear by the beneﬁts associated with experience. The dominant guidelines on director overboardedness in South Africa. effect, as well as the associated beneﬁts and costs, is This emerging country provides an interesting case study in inﬂuenced by corporate characteristics such as company that there has been signiﬁcant pressure on companies post- size and the industry in which the company operates 1994 to transform the racial and gender composition of (Clements et al. 2015). their boards. However, given the limited pool of female Research shows that directors not only tend to serve on and black candidates, concerns have been raised about more than one board, but that their time commitments to directors being too busy to perform their duties effectively each of these boards are also rapidly increasing (Orol 2016; (Mans-Kemp and Viviers 2015). Anecdotal evidence sug- National Association of Corporate Directors 2015). In the gests that the busyness hypothesis prevails in South Africa United States (US), for instance, directors committed as far as diverse candidates are concerned. This is evident approximately 248 h to board matters in 2015 compared to from shareholder activists complaining about poor meeting 190 h in 2005, reﬂecting an increase of more than 30%. On attendance, particularly among diverse directors (Barron average, a US director serves on approximately ﬁve boards 2018; Kabi 2015; Barry 2014). Given that the country has a simultaneously, which include boards of public, private limited number of eligible board candidates, over-utilisa- and non-proﬁt companies (Orol 2016; National Association tion of the talent pool poses a considerable challenge to of Corporate Directors 2015). To address the adverse nomination committees (Inoxico 2013). effects of overboardedness, more than 75% of S&P 500 The topic of overboardedness has, however, only companies have recently limited the number of additional recently received scholarly attention in South Africa. directorships. The majority of these companies capped the Williams et al. (2016) considered the density of director number of directorships at four or ﬁve (Spencer Stuart inter-connectedness among the 40 largest companies listed 2017). on the Johannesburg Stock Exchange (JSE), while Chi- Overboardedness is also gaining attention from proxy ranga and Chiwira (2014) examined the relationship advisors such as the Institutional Shareholder Services Inc. between overboardedness and the ﬁnancial performance of (ISS 2017). This proxy advisor attends to a director’s cat- selected JSE-listed ﬁrms. In 2013, the African data provi- egorisation as either an executive or a non-executive der Inoxico (2013) computed a so-called Director Singu- director when offering advice on overboardedness to US larity Index (DSI) to reﬂect the number of directorships asset owners and asset managers. While executive directors held by directors serving on the boards of 360 JSE-listed are involved in the day-to-day management of a ﬁrm, non- ﬁrms. The DSI highlighted the potential risks posed by executive directors are not full-time employees. They are director interlocking. supposed to bring independent judgement to board-level Given limited research, the authors of the current study decisions (Institute of Directors in Southern Africa set out to investigate the causes and consequences of (IoDSA) 2009). The ISS (2017) regards non-executive director overboardedness in South Africa. While previous directors as overboarded if they serve on more than ﬁve authors mainly applied positivistic approaches, this study boards of public companies at the same time. The ISS was conducted from the perspective of the directors furthermore recommends that chief executive ofﬁcers themselves by conducting semi-structured interviews to should not serve on more than two outside public boards at obtain their personal views on director overboardedness. the same time. In the United Kingdom (UK), the gover- The ﬁndings of this study will hopefully shed more light on nance code recommends that an executive director should the applicability of the busyness hypothesis in the local not hold more than one non-executive position in a context. Unless nomination committees have a better Financial Times Stock Exchange 100 company (Financial understanding of the consequences of overboarded direc- Reporting Council 2016). Listed companies are required to tors, companies are likely to face more criticism from implement the code on a ‘‘comply or explain’’ basis. shareholders and the public at large. As can be seen, the phenomenon of overboardedness has The following literature review centres on the phe- mainly been investigated by researchers in developed nomena of director interlocking and overboardedness. markets such as the US (e.g. Lamb 2017; Roudaki and Thereafter, the qualitative research design and methodol- Bhuiyan 2015; Jiraporn et al. 2009b; Fich and Shivdasani ogy are explained. Based on the ﬁndings, recommendations 2006; Kiel and Nicholson 2006; Mizruchi and Stearns are offered to companies, directors, nomination committees 1988). Recently, a few studies on director overboardedness and shareholders. Suggestions for future research are also have also been published in emerging markets, notably in provided. India (Jackling and Johl 2009; Sarkar and Sarkar 2009; Ghosh 2007) and Malaysia (Haniffa and Hudaib 2006). 212 N. Mans-Kemp et al. Chen 2008; Harris and Shimizu 2004) attributed their Director interlocking and overboardedness results to the experience hypothesis and a ﬁrm’s degree of Director interlocking refers to the practice of board mem- resource dependence. Chen (2008) postulated that non-executive directors bers who serve on the boards of multiple corporations (Bohman 2010). The experience hypothesis suggests that holding multiple directorships could have different impli- cations for boards, depending on the boards’ monitoring director interlocking could offer several advantages. However, if a director serves on an excessive number of and advising needs. Non-executive directors holding more than two directorships tended to be better advisors than boards, he/she might become overboarded, which has led to the term ‘‘overboardedness’’. The busyness hypothesis, monitors. Lee and Lee (2014) documented a positive association between company value (as measured by on the other hand, relates overboardedness to several Tobin’s Q) and multiple directorships in ﬁrms where a high negative outcomes. These two hypotheses are explored in degree of monitoring is required. These are typically large more detail next. companies and those owning many intangible assets. The experience hypothesis Interlocked directors can offer access to several points of reference when advice is required. According to the experience (or reputational capital) The categorisation of directors as executives or non- executives should be taken into account when assessing the hypothesis, directors can gain invaluable experience and enhance their social connections by serving on several impact of overboardedness (Sarkar and Sarkar 2009). These authors reported that while multiple directorships for boards at the same time (Clements et al. 2015; Ferris et al. executive directors were negatively related to ﬁrm perfor- 2003). This hypothesis relates to the resource dependence mance, multiple directorships by independent directors theory that is based on the principle that organisations were positively related with the performance of 500 large engage in transactions with other entities to acquire listed manufacturing companies in India. They used the resources, such as capital, material and labour. Companies return-on-assets ratio, market-to-book ratio, Tobin’s Q and aim to enhance their bargaining position in resource-related transactions, inter alia by developing links to other net-value-added-to-assets to measure company perfor- mance. They furthermore reported that the multi-boarded organisations (Hillman et al. 2000; Pfeffer and Salancik 1978). independent directors did not miss a considerable number of board meetings. Director interlocking offer several advantages to com- panies and directors. By enlarging a ﬁrm’s social network, The number of outside board positions could have a substantial impact when assessing both the experience and resources may become more accessible (Kim and Kim busyness hypotheses. Iturriaga and Rodrı´guez (2014 2015; Carpenter and Westphal 2001). Field et al. (2013) ) reported that for low levels of multiple directorships, the acknowledged that overboarded directors are often more experience effect seemed to prevail. These authors found experienced and better connected to inﬂuential people in the industry compared to their counterparts who serve on that Spanish directors who served on a limited number of boards enhanced their skills and had more incentives to fewer boards. Furthermore, multi-boarded directors’ experience and contacts make them excellent advisors. perform directorial duties with a resulting positive impact on a ﬁrm’s ﬁnancial performance. However, after a Proponents of the experience hypothesis thus claim that multiple directorships are a sign of a ‘‘director’s quality’’, threshold of four boards was reached, most directors became ‘‘overwhelmed’’. Kaczmarek et al. (2014) asserted as the number of board positions is related to the extent of an individual’s reputational capital (Clements et al. 2015). that excessive interlocking is likely to compromise direc- tors’ commitment and attention and that the effects of the Nomination committees also tend to view interlocked busyness hypothesis might then arise. directors as ‘‘high-quality’’ individuals and therefore invite them to serve on even more boards (Ferris et al. 2003). The busyness hypothesis Three factors that inﬂuence the number of board invi- tations to a director have been identiﬁed by Ferris et al. The busyness hypothesis postulates that if directors become (2003). These authors found that directors who attract the most attention have typically served on the boards of big overcommitted, they might become less effective corporate monitors (Clements et al. 2015). The hypothesis is linked companies, companies with large boards and companies with sound ﬁnancial performance. They ascribed their to the agency theory. In the light of the separation between ownership and control, the agency theory suggests that ﬁndings to the reputational effect. Several authors who found a positive relationship between overboardedness and conﬂict of interest might arise between shareholders and managers (Jensen and Meckling 1976). In an attempt to ﬁnancial performance (e.g. Lamb 2017; Lee and Lee 2014; curb agency conﬂict and to limit resultant agency costs, Exploring the causes and consequences of director overboardedness in an emerging market 213 considerable focus is placed on the monitoring role of the has set voluntary targets to improve female board repre- board (Haniffa and Hudaib 2006). sentation (Davies 2015). Individuals who hold multiple directorships simultane- Although JSE-listed companies are not legally obliged ously face severe time constraints (Ahn et al. 2010). As a to appoint female and black directors, the King III Report result, their reduced attention may affect their ability to encouraged boards to consider whether their size and provide sound advice. Researchers have furthermore demographic characteristics (notably race, gender, age and argued that overboarded directors tend to miss a dispro- expertise) make them effective (IoDSA 2009). The latest portionate number of board meetings (Chiranga and Chi- King Report highlights the need for governing bodies to set wira 2014; Jiraporn et al. 2009a). and disclose their progress towards voluntary, company- Authors who reported a negative association between speciﬁc targets for board diversity in respect of ethnicity overboardedness and a company’s ﬁnancial performance and gender (IoDSA 2016). ascribed this relationship to the busyness effect (Clements Given the limited talent pool, eligible female and black et al. 2015; Fich and Shivdasani 2006). Kaczmarek et al. directors are invited to serve on several boards simultane- (2014), for example, showed that excessive interlocking ously. As a result, they may become overboarded (Jackling occurring at large ﬁnancial and utility ﬁrms in the UK and Johl 2009). Sarkar and Sarkar (2009) added that the compromised directors’ attention and had a negative relatively high permissible limits on multiple directorships impact on these ﬁrms’ ﬁnancial performance. The ﬁnancial in India could be driven by supply constraints in the performance of these ﬁrms was measured by Tobin’s Q and managerial labour market. Roudaki and Bhuiyan (2015) market-to-book ratio over a 10-year period. also attributed the large number of interlocked directors in Fich and Shivdasani (2006) reported similar results for New Zealand to a shortage of qualiﬁed and independent busy non-executive directors in the US. They warned that if directors. non-executive directors held three or more board positions Scholars such as Kaczmarek et al. (2014) posited that they could become overcommitted and their monitoring board diversity could act as a moderator of the interlock- ability could decrease. Liu and Paul (2015) reported that ing–ﬁrm–performance relationship, particularly when try- the negative effects of busyness are even more pervasive ing to reconcile the busyness and experience hypotheses. for executive directors than for non-executive directors. These authors also asserted that there is considerable The relationship between corporate governance and the potential for the dissemination of ideas when companies social networks of 1600 directors of selected listed German are intertwined. Knowledge exchange is partly facilitated companies between 2003 and 2006 was examined by by the level of and changes in board diversity. Diverse Andres et al. (2013). These authors found that companies directors could make valuable contributions to boards. with well-connected directors experienced lower market- They should, however, be aware of the risks of becoming based ﬁnancial performance (as measured by Tobin’s Q) ‘‘over-stretched’’ by serving on too many boards and paid their executives a higher salary than companies simultaneously. with fewer interlocked directors. They ascribed their ﬁnd- ings to the poor monitoring ability of directors being too embedded in social networks. They added that possible Research design and methodology overboardedness should be considered prior to the nomi- nation of board candidates. In this respect, nomination It is evident from the literature review that, although committees have a considerable inﬂuence on the compo- director overboardedness can be regarded as a managerial sition of directorates (Ruigrok et al. 2006). challenge, multiple directorships can also offer several advantages to directors and the companies where they The relationship between board diversity serve. Given limited academic enquiry into the topic of and overboardedness director overboardedness in South Africa, an exploratory study was undertaken. Primary data were collected by As explained earlier, director overboardedness can be conducting semi-structured interviews with 10 directors of ascribed to several factors, including the size of the com- JSE-listed companies. The researchers used their judge- pany, and the beneﬁts of directors gaining prestige and ment to identify suitable research participants. These par- access to social networks. Pressure on companies to ticipants’ eligibility was measured in terms of experience, improve their board diversity may also play a role, as categorisation (executive or non-executive director), age, companies are increasingly required to diversify their ethnicity, gender and type of industry in which their directorates’ composition. In Norway, for instance, listed respective companies conducted business. companies are obliged to appoint female directors to reach The interview guide consisted of open-ended questions. a quota (Ahern and Dittmar 2012), while the UK legislator Biographic information was requested followed by 214 N. Mans-Kemp et al. questions related to the causes and consequences of Deﬁnitions provided by participants included ‘‘overboard- director overboardedness. Both the advantages and disad- edness occurs when directors sit on numerous boards and vantages of the busyness and experience hypotheses were are unable to properly fulﬁl their duties’’; ‘‘directors who encapsulated in the questions. Seven interviews were are spread too thinly due to taking on too many board conducted in person and three via Skype between June responsibilities’’; and ‘‘when individuals are represented on 2017 and April 2018. The interviews were voice-recorded too many boards and it then has a negative impact on their and then transcribed. Data analysis comprised a descriptive effectiveness’’. From these deﬁnitions, it was evident that overview of the sample’s characteristics, followed by a the interviewees had fairly negative connotations of the thematic analysis (Braun and Clarke 2006). Thematic phenomenon. analysis is commonly used to identify themes when com- Several participants perceived some local directors as paring the responses gathered from interviews. being overboarded. Williams et al. (2016) conﬁrmed that To protect the anonymity of the interviewees, an over- the South African director network includes several indi- view of the sample’s demographic characteristics is pro- viduals who serve on multiple boards at the same time. vided, instead of offering details on each individual’s Three participants, however, cautioned that the term demographic proﬁle. The least experienced interviewee ‘‘overboardedness’’ should not be generalised by implying had been a director for 8 years, whereas the most experi- that all directors with more than one board position are enced interviewee had served on the boards of JSE-listed overboarded. According to them, overboardedness should companies for 44 years. The sample included an equal be assessed on a case-by-case basis. In support of this view, number of executive and non-executive directors. The one interviewee stated that ‘‘if you serve [on the board] of a participants’ ages ranged from 34 to 69. An equal number listed company and [its] committees, it takes up time but of black and white participants, and males and females having said that, some people do not do anything except sit were included in the sample. on boards for a living’’. The interviewees served on the boards of companies Another participant added that some directors are cap- doing business in the industrial, consumer goods, consumer able of dealing with more responsibilities than others. services, ﬁnancial, technology and telecommunications When evaluating overboardedness, attention should thus be sectors. On average, the interviewees served on approxi- given to a director’s number of board positions at both mately two boards of listed and three boards of unlisted listed and unlisted companies, and their ability to manage entities, based on their board positions at the time when the the associated responsibilities. These views relate to the interviews were conducted. The maximum number of literature (Clements et al. 2015; Lee and Lee 2014) which board positions that an interviewee held at the same time states that corporate context and individual circumstances was four listed companies and nine unlisted companies. should be taken into account when assessing The interviewees simultaneously served on between one overboardedness. and ﬁve board committees. Pertaining to credibility and conformability, the ques- Possible causes of overboardedness tions posed were based on academic sources reported in the literature section and the ﬁndings were linked to the liter- The second theme that emerged from the data analysis ature where applicable. The authors aimed to ensure that centred on the possible causes of directors overboarded- the participants’ views were accurately reﬂected by reading ness. Three possible reasons were identiﬁed in the local through the interview transcriptions several times. Prior to context, namely the limited pool of eligible board candi- the research, ethical clearance was obtained from the uni- dates, board transformation requirements and ﬁnancial versity’s research ethics committee. rewards. According to the data provider Inoxico (2013), the over- utilisation of the relatively small pool of skilled directors is Findings and discussion a real challenge in South Africa. Several participants in this study also emphasised the country’s limited talent pool as Six themes were identiﬁed. These themes are discussed in contributing to interlocking, especially pertaining to eligi- the following sections. ble non-executive directors. One participant pointed out that ‘‘everyone is drawing from the same small pool and Awareness of overboardedness in the South African when you ask a company if they would mind overboard- context edness versus having the right skills and experience on the board, they would generally rather deal with overboard- The majority of participants were familiar with the phe- edness’’. In New Zealand, Roudaki and Bhuiyan (2015) nomenon of director overboardedness or interlocking. Exploring the causes and consequences of director overboardedness in an emerging market 215 also ascribed overboardedness to a shortage of qualiﬁed, of the nomination committee to assist and develop such independent directors. directors was emphasised. A participant hinted that it is ‘‘difﬁcult to put a director An alternative view was raised, namely that competition in a listed entity as a ﬁrst-time board appointment’’. Such among companies might limit the number of board posi- directors often require extensive development. This par- tions held by sought-after diverse candidates. One of the ticipant added that there were companies that were indeed interviewees remarked that ‘‘in most industries you have a appointing and developing inexperienced directors. few signiﬁcant players and as soon as you are associated According to this participant, the pool was thus growing, with one of those groups you are disqualiﬁed from being albeit at a slow pace. Researchers in emerging markets involved in other groups. So it is not just the limited pool, it likewise suggested that a limited talent pool might con- is [also] the competitive situation that you are in’’. tribute to overboardedness (Jackling and Johl 2009; Sarkar In line with the literature, notably Kaczmarek et al. and Sarkar 2009). (2014) and Hafsi and Turgut (2013), several interviewees One director remarked that ‘‘if you follow the careers of recommended that other board diversity elements such as most of the sought-after diverse candidates, it is amazing to experience, educational background and age should also be see how their number of boards grows’’. An interviewee, taken into account in addition to ethnicity and gender when who believed that the local talent pool was ‘‘very small’’, directors are appointed. One participant remarked that an explained that this pool historically comprised a majority age differential was of particular importance in certain of mature white males ‘‘who served on several boards and areas, and that ‘‘you might need to stay up to date in fast- who all knew each other’’. However, according to him, the moving industries such as technology’’. This view is sup- dynamics was changing to include diverse candidates, ported by Barrett (2017) who found that information especially ‘‘younger black females’’. Research by Mans- technology ﬁrms had, on average, the youngest directors of Kemp and Viviers (2015) conﬁrms that the number of all considered S&P 500 companies. black and female directors serving on the boards of JSE- Reference was also made to the monetary beneﬁts listed companies has increased signiﬁcantly since 2002. associated with holding multiple board positions, as one Further changes in board ethnicity and gender diversity can participant remarked: ‘‘Some people take as many [direc- be expected in the light of the King IV Report’s recom- torships] as you offer them because of the money’’. This mendations on board diversity (IoDSA 2016). view concurs with Andres et al. (2013) who found that One director remarked that the incorporation of board substantial monetary beneﬁts encourage directors to accept diversity requirements in the JSE listing requirements (JSE several board positions. In addition, the local media has 2017) left public companies with no other option than focused on the controversial topic of excessive executive compensation as it has been revealed that executives to change. A counterpart, however, warned that ‘‘imposing board diversity agendas can be to the detriment of skills if earned almost 500 times more than the average South unqualiﬁed [incompetent] individuals are hired only to African employee (Lu and Melin 2016). meet diversity requirements’’. Another interviewee, however, claimed that not all An interviewee noted that black females were especially directors are driven primarily by ﬁnancial rewards. He in high demand as they could contribute to both board indicated that some individuals accepted more non-exec- ethnicity and gender targets: ‘‘As soon as you know of one utive positions ‘‘to stay connected and to coach and mentor [deﬁned by the participant as a black female] and she is younger directors’’. The support of a seasoned mentor competent, the news spreads like wild ﬁre and she gets could enable a promising, diverse candidate to develop the appointed to nearly every board’’. Another interviewee perspectives and vision that are needed to reach their full warned that experienced female directors would become potential (Clutterbuck and Megginson 1999). even more overboarded unless more females were trained and more board opportunities were offered to increase the Directors’ views on the experience hypothesis talent pool. Participants’ views were gauged on the phenomenon of Several participants mentioned beneﬁts of overboardedness so-called token director appointments. In line with the that could be linked to the experience hypothesis and ﬁndings of Nyirenda (2010), a number of participants resource dependence theory. One mentioned that multiple acknowledged that certain board appointments were made board memberships indeed ‘‘help[ed] with efﬁciency and based on ethnicity or gender, but that this practice was familiarity’’. Other positive remarks included the follow- decreasing. Other participants, however, remarked that ing: ‘‘Directors who serve on many boards have a broad inexperienced, diverse individuals were sometimes regar- range of experience and they can apply their learning from ded as tokens when appointed to their ﬁrst board. The role other boards to your company’’ and ‘‘you are tapping into one source with multiple points of reference [multi- 216 N. Mans-Kemp et al. boarded director] into the economy, [and] into different their board responsibilities (Clements et al. 2015). In line industries’’. Sarkar and Sarkar (2009) conﬁrmed that with this hypothesis, one participant went as far to say that interlocked directors could expand their access to social ‘‘if you have a board full of overboarded directors you are networks. Field et al. (2013) furthermore acknowledged on a sure road to disaster’’. He added that ‘‘in most cases that overboarded directors are often more experienced and you would not have more than two or three [overboarded better connected than their counterparts who serve on members] on a board in which case the other directors fewer boards. often carry the board’’. The view was also raised that overboarded directors are Considering their responses, it was evident that the not by implication unprepared for meetings and do not participants’ largest concerns pertaining to overboarded- necessarily give insufﬁcient attention to corporate matters, ness were excessive time commitments and insufﬁcient as suggested by the busyness hypothesis. An interviewee meeting attendance. A participant mentioned that by remarked: ‘‘I have seen non-executive directors who serve serving on too many boards, it might be challenging to on many boards contribute to our board the most in the ‘‘apply your mind’’, while another director said that ‘‘as past. The ﬁrst impression might have been that the indi- soon as you see someone with a poor attendance record that vidual served on too many boards, how is he possibly going would be a very big red ﬂag’’. Jiraporn et al. (2009a) to add value to our board? The reality has turned out to be conﬁrmed that board members who hold multiple positions the opposite’’. She concluded that ‘‘it depends from indi- at the same time have a tendency to miss board meetings. vidual to individual as to how committed, focused and Some participants furthermore cautioned against agree- professional they are. Some people would self-manage ing to serve on several challenging board committees, whether they are overboarded or not’’. Overboardedness particularly audit committees. A participant remarked that should hence be assessed on a case-by-case basis. ‘‘audit committees require a lot of work and if you do not Another participant conﬁrmed that companies can ben- spend the time going carefully through the papers you are eﬁt considerably from tapping into a multi-boarded direc- not going to ask the right questions; you are not going to tor’s wealth of experience and knowledge by stating that engage with the management or the internal or external ‘‘if something works in one company and it is efﬁcient, it audit and you run a severe risk of not actually doing your very quickly spreads across to other entities’’. As such, best job’’. These views are supported by the ﬁndings of Jiraporn practice could be adopted across the companies which a et al. (2009b) that an increase in overboardedness decreases director represents. This participant, however, warned the likelihood of a director serving on compensation and against ‘‘pooled thinking’’. Colaco et al. (2011) also cau- audit committees. tioned against so-called groupthinking, arguing that board The participants also pointed out that it was challenging for them to coordinate diaries to accommodate several heterogeneity enhances decision-making by increasing access to multiple points of view. As boards become more board and committee meetings. Board meetings are typi- diverse, the propensity of directors thinking and acting in cally scheduled annually in advance and attempts are made the same way diminishes. to resolve issues. Unavoidable clashes might, however, Four participants were of the opinion that overboard- negatively affect attendance records. A participant edness would not have a negative impact on ﬁnancial remarked that ‘‘for the most common board meeting performance. They mainly based their view on the per- months, those people [directors holding multiple board ceived competencies of the executive team. One of the positions] are being stretched immensely’’. participants believed that ‘‘the day-to-day running of the A counterpart argued that attendance fees encouraged company is handled by the executive directors, so you directors not to miss meetings. He explained that board would expect them to be prudent’’. Another participant meeting attendance are ‘‘usually extremely high, but we all summarised the possible beneﬁts related to director inter- know that you are not a director for 3 h, four times a year; locking as follows: ‘‘I think the concept of serving on more you are a director every single day of the year. So based on than one board is a positive one but certainly once it goes attendance, I do not think it impacts attendance because the beyond a point where you can really put the effort in, then calendar is agreed a year before the time’’. He continued by it becomes a problem’’. Negative outcomes as postulated saying ‘‘whether directors sit on ﬁve boards or 20 boards by the busyness hypothesis might then arise. they all coordinate their calendars and they make sure they attend because that is the thing that is being recorded. Also Directors’ views on the busyness hypothesis the JSE is on a drive to say no to annual retainer fees. So with a per attendance fee, directors are attending’’. As explained earlier, the busyness hypothesis postulates In line with the busyness theory, the majority of the that multi-boarded directors could become overcommitted interviewees indicated that overboardedness might indeed and could ﬁnd it difﬁcult to give sufﬁcient attention to all contribute to poor corporate governance. Participants Exploring the causes and consequences of director overboardedness in an emerging market 217 added that the quality of meeting preparation and directors’ considering personal and corporate circumstances. They willingness to stay updated, however, diminished the hence opposed regulation on multiple directorships, as one negative impact of overboardedness on corporate gover- director explained: ‘‘I do not think there is a magic number nance. Although some international researchers (Kacz- as it depends on the individual and the companies con- marek et al. 2014; Fich and Shivdasani 2006) reported that cerned and the board members’ familiarity with the boards with many busy directors were associated with industries in which these companies are’’. insufﬁcient corporate governance and ultimately poor Recommendations pertaining to the maximum number ﬁnancial performance, Chiranga and Chiwira (2014) noted of board positions that should be allowed differed. The no signiﬁcant association between multiple directorships opinion was raised that executives would struggle to attend and ﬁnancial performance for selected South African to more than one or two additional board positions. The directors over the period 2006–2012. size of the company on whose board directors served was One of the interviewees expressed the view that expe- also mentioned as a determining factor: ‘‘If you take board rience does not necessarily mean that a director will make positions at substantial [large] companies, you can maybe valuable contributions: ‘‘One could argue that experienced serve on two or three boards’’. Another interviewee con- directors do not need to spend hours reviewing board cluded that ﬁve or six directorships could be held if the packs, because they know what the ﬁnancials look like, but boards were small and had simple structures. Previous that is where the risk lies’’. Experienced directors might authors (Fich and Shivdasani 2006; Ferris et al. 2003) become ‘‘too complacent about what they are doing’’. regarded directors overboarded if they served on more than An experienced director explained that travel require- three boards. ments and industry familiarity could also play a role in the Five interviewees agreed that the future King V Report number of directorships that a director could deal with should include a section on directors serving on multiple effectively. He described board meetings abroad as being boards to offer more guidance, but that it should not pre- ‘‘more difﬁcult to attend’’ than local meetings. He was also scribe a speciﬁc limit. They were in favour of a principles- of the opinion that a new board position would be easier to based approach that allows ﬂexibility considering each manage if it were in a familiar industry, since ‘‘a direc- company’s and director’s circumstances. Participants also torship in a new industry takes a fair amount of time to opposed the regulation of director interlocking, given understand’’. This view is in agreement with Clements South Africa’s limited pool of eligible board candidates et al. (2015) who documented a decrease in corporate and the need to diversify directorates. governance compliance when directors of small ﬁrms increased board memberships in unrelated companies. Mechanisms to manage overboardedness Another theme that emerged from the data analysis centred on participants’ suggestions for addressing director The participants highlighted that nomination committees overboardedness in South Africa. and board evaluations could play a signiﬁcant role to manage overboardedness and to address related concerns. The way forward in South Africa In line with Kiel and Nicholson (2006), the interviewees recommended that all board positions held by an individual The majority of the participants acknowledged the positive should be discussed during board and individual director change in the philosophy of the King IV Report to a more evaluations. By undertaking such regular and rigorous outcomes-based approach with fewer principles in com- evaluations, directorates have a mechanism to guard parison with King III. The King IV Report encourages against over-commitment and to address insufﬁcient per- directorates to apply ‘‘integrated thinking’’ to reﬂect on formance by individual board members (Kiel et al. 2005). how the principles apply to their organisations (IoDSA A participant explained that the results of the annual 2016). Although no pertinent guidelines are offered on board performance reviews are presented to each director director overboardedness in King IV, one interviewee and the nomination committee. If a board member is found believed that the King Committee is inadvertently to be overcommitted, the issue needs to be resolved before attempting to address the overboardedness issue. The King the following re-election. Another counterpart conﬁrmed IV Report recommends that non-executive candidates that before recommending directors for re-election, his should provide details regarding their professional com- company’s nomination committee evaluates whether these mitments and conﬁrm that they have enough time to fulﬁl directors ‘‘are actually devoting enough time’’, whether their responsibilities (IoDSA 2016). they are ‘‘performing’’ and whether they are doing ‘‘what Most of the participants believed that it was challenging they are supposed to do’’. He regarded meeting attendance to make a rule that would limit the number of board records as ‘‘hard evidence’’ in this regard. positions that an individual director could hold, without 218 N. Mans-Kemp et al. Several participants in this study agreed with Andres make valuable contributions to companies and ultimately et al.’s (2013) suggestion that the possibility of over- enhance their ﬁnancial performance. boardedness should be considered before nominating board In line with the busyness hypothesis, the participants in candidates. One participant remarked that ‘‘possible over- this study conﬁrmed that overboardedness was a concern boardedness should be a fundamental discussion point for for some JSE directors. They stressed the negative out- the nomination committee when recruiting new directors’’. comes of overboardedness, such as becoming overcom- However, the majority of interviewees reported that they mitted and being unable to fulﬁl their responsibilities. had never formally discussed overboardedness during Insufﬁcient meeting attendance was also mentioned. board and/or board committee meetings. However, the interviewees also highlighted several The participants also offered several recommendations advantages related to the experience hypothesis. Multi- to expand the talent pool in South Africa in an attempt to boarded directors could offer invaluable advice and expand curb overboardedness. The responsibility of companies to a company’s access to social networks. take action in this regard was highlighted. Participants Some participants mentioned that a diligent individual recommended that more formal training and education could give sufﬁcient attention to board responsibilities and should be provided to board candidates. Suggestions were make a valuable contribution despite serving on multiple also made to elect ‘‘younger persons’’ to subsidiary boards boards. They hence argued that overboardedness should and to introduce junior directorates to the boards of non- not be generalised and that such instances should be con- proﬁt organisations where they can gain experience. Junior sidered on a case-by-case basis. Travel requirements, boards are typically used in non-proﬁt organisations, experience, capabilities and industry knowledge could play allowing young professionals to express their views and an important role in determining the number of director- insights while being mentored (BoardAssist 2015). ships that an individual can successfully manage. The role of director recruitment agencies was also Three possible reasons for overboardedness were iden- mentioned. A participant noted that these agencies were tiﬁed, namely the limited pool of eligible directors in South ‘‘not bringing new people to the table’’. Recruitment Africa, board transformation targets and monetary beneﬁts. agencies could source board candidates beyond the tradi- Participants remarked that companies were competing to tional local circles, e.g. from academia and abroad. Other attract the same limited number of board candidates. They interviewees mentioned that professional industry associ- stated that regulation that limits multiple directorships ations, such as the South African Institute of Chartered might strain the ability of boards to function effectively. Accountants and the South African Property Owners Such restrictions could also hamper companies’ ability to Association could introduce promising board candidates to diversify their boards. Interviewees furthermore mentioned companies. Two interviewees furthermore recommended that some individuals primarily accepted more board that more business schools should offer training pro- positions to beneﬁt ﬁnancially. grammes for aspiring board candidates. Participants offered several suggestions to increase the pool of eligible board candidates, including more training and education initiatives for promising, diverse candidates. Conclusions and recommendations Companies could allocate more time and resources to train board candidates. Recruitment agencies could also play a The agency and resource dependence theories have been more prominent role in expanding the talent pool by inter employed by previous researchers to investigate director alia sourcing new directors from academia and abroad. overboardedness. The experience hypothesis predicts that They could also invite talented directors who are ending director interlocking enhances companies’ access to social their executive careers to continue their careers as non- networks, expertise and other resources. In contrast, the executive directors. Such individuals could serve as men- busyness hypothesis relates to the agency theory and pos- tors to inexperienced and young candidates. Board targets tulates that overcommitted directors are not effective for ethnicity and gender diversity might further encourage monitors. companies to develop eligible individuals who could be Researchers in developed markets reported conﬂicting nominated for board positions in future. results on the relationship between director overboarded- As part of the director recruitment criteria, nomination ness and ﬁnancial performance. Based on the argument that committees should scrutinise candidates’ re´sume´s to ensure overboarded directors may become too busy to fulﬁl their that they can give sufﬁcient attention to another board multiple board duties, some researchers argued that over- position. Directors who are perceived to be overcommitted boarded directors could contribute to insufﬁcient corporate should not be invited to serve on more boards. Nomination governance and ultimately poor ﬁnancial performance. committees should request that a candidate step down from Other scholars claimed that multi-boarded directors could one or more boards. Shareholders have the ultimate Exploring the causes and consequences of director overboardedness in an emerging market 219 BoardAssist. 2015. Top 9 tips for managing your junior board, 20 responsibility to evaluate a nominee’s ability to take on October. https://boardassist.org/blog/top-9-tips-managing- more positions before voting at shareholder meetings. junior-board/. 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Publisher: Springer Journals
Copyright: Copyright © 2018 by The Author(s)
Subject: Business and Management; Business and Management, general; Accounting/Auditing; Corporate Finance; Corporate Governance
ISSN: 1741-3591
eISSN: 1746-6539
DOI: 10.1057/s41310-018-0048-9
Publisher site: See Article on Publisher Site

Abstract

Int J Discl Gov (2018) 15:210–220 https://doi.org/10.1057/s41310-018-0048-9 ORIGINAL ARTICLE Exploring the causes and consequences of director overboardedness in an emerging market 1 1 1 • • Nadia Mans-Kemp Suzette Viviers Sian Collins Received: 12 October 2018 / Published online: 29 October 2018 The Author(s) 2018 Abstract Scholars and shareholder activists have raised more complex when individuals serve on multiple direc- concerns about directors serving on multiple boards torates simultaneously (Oehmichen et al. 2017; Kaczmarek simultaneously. Semi-structured interviews were con- et al. 2014). A board of directors is not only responsible for ducted with 10 experienced diverse South African directors setting the company’s strategic direction, but it should also to investigate the causes and consequences of overboard- ensure that managers implement the strategy in an efﬁcient edness. Interviewees identiﬁed the limited talent pool and and ethical manner. board diversity targets as the main causes of overboard- The effectiveness of directors’ monitoring role was edness (or interlocking as it is also called). In line with the questioned after the 2008 global ﬁnancial crisis (Hill and busyness hypothesis, poor meeting attendance by over- McDonnell 2013). Much of the criticism stemmed from boarded directors was highlighted by some participants. shareholders who argued that board members should have However, others claimed that director interlocking could adopted a more active oversight role on their behalf. An offer invaluable access to social networks and resources, increasing number of shareholders and other ﬁnanciers lending support to the experience hypothesis. Director started to interrogate boards and objected to directors who busyness should hence be considered on a case-by-case held multiple board positions, claiming that they might not basis. be able to effectively fulﬁl their manifold roles (Orol 2016; Ferris et al. 2003). The term ‘‘overboardedness’’ refers to Keywords Agency theory Busyness hypothesis Director directors who serve on too many boards at the same time interlocking Director overboardedness Experience (Harris and Shimizu 2004). Although there is not a gen- hypothesis Resource dependence erally accepted guideline for the number of board positions that is likely to result in overboardedness, previous authors suggested that three or more outside (external) board positions could be regarded as excessive (Lee and Lee Introduction 2014; Fich and Shivdasani 2006). Being a director of a public or private company could be Two schools of thought have emerged to explain the regarded as a double-edged sword. The beneﬁts, such as consequences of director overboardedness or interlocking prestige and substantial remuneration, should be weighed as it is also called. The experience hypothesis postulates against the potential for reputational damage, time com- that multiple directorships may result in directors gaining mitments and the duties accompanying each board position invaluable experience and access to vast social networks (Katz and McIntosh 2016). The balancing act becomes and resources (Clements et al. 2015; Carpenter and West- phal 2001). In contrast, the busyness hypothesis suggests that directors might become overcommitted if they serve & Nadia Mans-Kemp on several boards at the same time (Jiraporn et al. 2009b; nadiamans@sun.ac.za Fich and Shivdasani 2006). The main consequences of directors being overextended Department of Business Management, Stellenbosch include insufﬁcient meeting attendance and limited University, Private Bag X1, Matieland 7602, South Africa Exploring the causes and consequences of director overboardedness in an emerging market 211 monitoring ability. The two hypotheses are not necessarily Despite having one of the best developed corporate competing. The disadvantages of busyness might be offset governance frameworks in the world, there are no clear by the beneﬁts associated with experience. The dominant guidelines on director overboardedness in South Africa. effect, as well as the associated beneﬁts and costs, is This emerging country provides an interesting case study in inﬂuenced by corporate characteristics such as company that there has been signiﬁcant pressure on companies post- size and the industry in which the company operates 1994 to transform the racial and gender composition of (Clements et al. 2015). their boards. However, given the limited pool of female Research shows that directors not only tend to serve on and black candidates, concerns have been raised about more than one board, but that their time commitments to directors being too busy to perform their duties effectively each of these boards are also rapidly increasing (Orol 2016; (Mans-Kemp and Viviers 2015). Anecdotal evidence sug- National Association of Corporate Directors 2015). In the gests that the busyness hypothesis prevails in South Africa United States (US), for instance, directors committed as far as diverse candidates are concerned. This is evident approximately 248 h to board matters in 2015 compared to from shareholder activists complaining about poor meeting 190 h in 2005, reﬂecting an increase of more than 30%. On attendance, particularly among diverse directors (Barron average, a US director serves on approximately ﬁve boards 2018; Kabi 2015; Barry 2014). Given that the country has a simultaneously, which include boards of public, private limited number of eligible board candidates, over-utilisa- and non-proﬁt companies (Orol 2016; National Association tion of the talent pool poses a considerable challenge to of Corporate Directors 2015). To address the adverse nomination committees (Inoxico 2013). effects of overboardedness, more than 75% of S&P 500 The topic of overboardedness has, however, only companies have recently limited the number of additional recently received scholarly attention in South Africa. directorships. The majority of these companies capped the Williams et al. (2016) considered the density of director number of directorships at four or ﬁve (Spencer Stuart inter-connectedness among the 40 largest companies listed 2017). on the Johannesburg Stock Exchange (JSE), while Chi- Overboardedness is also gaining attention from proxy ranga and Chiwira (2014) examined the relationship advisors such as the Institutional Shareholder Services Inc. between overboardedness and the ﬁnancial performance of (ISS 2017). This proxy advisor attends to a director’s cat- selected JSE-listed ﬁrms. In 2013, the African data provi- egorisation as either an executive or a non-executive der Inoxico (2013) computed a so-called Director Singu- director when offering advice on overboardedness to US larity Index (DSI) to reﬂect the number of directorships asset owners and asset managers. While executive directors held by directors serving on the boards of 360 JSE-listed are involved in the day-to-day management of a ﬁrm, non- ﬁrms. The DSI highlighted the potential risks posed by executive directors are not full-time employees. They are director interlocking. supposed to bring independent judgement to board-level Given limited research, the authors of the current study decisions (Institute of Directors in Southern Africa set out to investigate the causes and consequences of (IoDSA) 2009). The ISS (2017) regards non-executive director overboardedness in South Africa. While previous directors as overboarded if they serve on more than ﬁve authors mainly applied positivistic approaches, this study boards of public companies at the same time. The ISS was conducted from the perspective of the directors furthermore recommends that chief executive ofﬁcers themselves by conducting semi-structured interviews to should not serve on more than two outside public boards at obtain their personal views on director overboardedness. the same time. In the United Kingdom (UK), the gover- The ﬁndings of this study will hopefully shed more light on nance code recommends that an executive director should the applicability of the busyness hypothesis in the local not hold more than one non-executive position in a context. Unless nomination committees have a better Financial Times Stock Exchange 100 company (Financial understanding of the consequences of overboarded direc- Reporting Council 2016). Listed companies are required to tors, companies are likely to face more criticism from implement the code on a ‘‘comply or explain’’ basis. shareholders and the public at large. As can be seen, the phenomenon of overboardedness has The following literature review centres on the phe- mainly been investigated by researchers in developed nomena of director interlocking and overboardedness. markets such as the US (e.g. Lamb 2017; Roudaki and Thereafter, the qualitative research design and methodol- Bhuiyan 2015; Jiraporn et al. 2009b; Fich and Shivdasani ogy are explained. Based on the ﬁndings, recommendations 2006; Kiel and Nicholson 2006; Mizruchi and Stearns are offered to companies, directors, nomination committees 1988). Recently, a few studies on director overboardedness and shareholders. Suggestions for future research are also have also been published in emerging markets, notably in provided. India (Jackling and Johl 2009; Sarkar and Sarkar 2009; Ghosh 2007) and Malaysia (Haniffa and Hudaib 2006). 212 N. Mans-Kemp et al. Chen 2008; Harris and Shimizu 2004) attributed their Director interlocking and overboardedness results to the experience hypothesis and a ﬁrm’s degree of Director interlocking refers to the practice of board mem- resource dependence. Chen (2008) postulated that non-executive directors bers who serve on the boards of multiple corporations (Bohman 2010). The experience hypothesis suggests that holding multiple directorships could have different impli- cations for boards, depending on the boards’ monitoring director interlocking could offer several advantages. However, if a director serves on an excessive number of and advising needs. Non-executive directors holding more than two directorships tended to be better advisors than boards, he/she might become overboarded, which has led to the term ‘‘overboardedness’’. The busyness hypothesis, monitors. Lee and Lee (2014) documented a positive association between company value (as measured by on the other hand, relates overboardedness to several Tobin’s Q) and multiple directorships in ﬁrms where a high negative outcomes. These two hypotheses are explored in degree of monitoring is required. These are typically large more detail next. companies and those owning many intangible assets. The experience hypothesis Interlocked directors can offer access to several points of reference when advice is required. According to the experience (or reputational capital) The categorisation of directors as executives or non- executives should be taken into account when assessing the hypothesis, directors can gain invaluable experience and enhance their social connections by serving on several impact of overboardedness (Sarkar and Sarkar 2009). These authors reported that while multiple directorships for boards at the same time (Clements et al. 2015; Ferris et al. executive directors were negatively related to ﬁrm perfor- 2003). This hypothesis relates to the resource dependence mance, multiple directorships by independent directors theory that is based on the principle that organisations were positively related with the performance of 500 large engage in transactions with other entities to acquire listed manufacturing companies in India. They used the resources, such as capital, material and labour. Companies return-on-assets ratio, market-to-book ratio, Tobin’s Q and aim to enhance their bargaining position in resource-related transactions, inter alia by developing links to other net-value-added-to-assets to measure company perfor- mance. They furthermore reported that the multi-boarded organisations (Hillman et al. 2000; Pfeffer and Salancik 1978). independent directors did not miss a considerable number of board meetings. Director interlocking offer several advantages to com- panies and directors. By enlarging a ﬁrm’s social network, The number of outside board positions could have a substantial impact when assessing both the experience and resources may become more accessible (Kim and Kim busyness hypotheses. Iturriaga and Rodrı´guez (2014 2015; Carpenter and Westphal 2001). Field et al. (2013) ) reported that for low levels of multiple directorships, the acknowledged that overboarded directors are often more experience effect seemed to prevail. These authors found experienced and better connected to inﬂuential people in the industry compared to their counterparts who serve on that Spanish directors who served on a limited number of boards enhanced their skills and had more incentives to fewer boards. Furthermore, multi-boarded directors’ experience and contacts make them excellent advisors. perform directorial duties with a resulting positive impact on a ﬁrm’s ﬁnancial performance. However, after a Proponents of the experience hypothesis thus claim that multiple directorships are a sign of a ‘‘director’s quality’’, threshold of four boards was reached, most directors became ‘‘overwhelmed’’. Kaczmarek et al. (2014) asserted as the number of board positions is related to the extent of an individual’s reputational capital (Clements et al. 2015). that excessive interlocking is likely to compromise direc- tors’ commitment and attention and that the effects of the Nomination committees also tend to view interlocked busyness hypothesis might then arise. directors as ‘‘high-quality’’ individuals and therefore invite them to serve on even more boards (Ferris et al. 2003). The busyness hypothesis Three factors that inﬂuence the number of board invi- tations to a director have been identiﬁed by Ferris et al. The busyness hypothesis postulates that if directors become (2003). These authors found that directors who attract the most attention have typically served on the boards of big overcommitted, they might become less effective corporate monitors (Clements et al. 2015). The hypothesis is linked companies, companies with large boards and companies with sound ﬁnancial performance. They ascribed their to the agency theory. In the light of the separation between ownership and control, the agency theory suggests that ﬁndings to the reputational effect. Several authors who found a positive relationship between overboardedness and conﬂict of interest might arise between shareholders and managers (Jensen and Meckling 1976). In an attempt to ﬁnancial performance (e.g. Lamb 2017; Lee and Lee 2014; curb agency conﬂict and to limit resultant agency costs, Exploring the causes and consequences of director overboardedness in an emerging market 213 considerable focus is placed on the monitoring role of the has set voluntary targets to improve female board repre- board (Haniffa and Hudaib 2006). sentation (Davies 2015). Individuals who hold multiple directorships simultane- Although JSE-listed companies are not legally obliged ously face severe time constraints (Ahn et al. 2010). As a to appoint female and black directors, the King III Report result, their reduced attention may affect their ability to encouraged boards to consider whether their size and provide sound advice. Researchers have furthermore demographic characteristics (notably race, gender, age and argued that overboarded directors tend to miss a dispro- expertise) make them effective (IoDSA 2009). The latest portionate number of board meetings (Chiranga and Chi- King Report highlights the need for governing bodies to set wira 2014; Jiraporn et al. 2009a). and disclose their progress towards voluntary, company- Authors who reported a negative association between speciﬁc targets for board diversity in respect of ethnicity overboardedness and a company’s ﬁnancial performance and gender (IoDSA 2016). ascribed this relationship to the busyness effect (Clements Given the limited talent pool, eligible female and black et al. 2015; Fich and Shivdasani 2006). Kaczmarek et al. directors are invited to serve on several boards simultane- (2014), for example, showed that excessive interlocking ously. As a result, they may become overboarded (Jackling occurring at large ﬁnancial and utility ﬁrms in the UK and Johl 2009). Sarkar and Sarkar (2009) added that the compromised directors’ attention and had a negative relatively high permissible limits on multiple directorships impact on these ﬁrms’ ﬁnancial performance. The ﬁnancial in India could be driven by supply constraints in the performance of these ﬁrms was measured by Tobin’s Q and managerial labour market. Roudaki and Bhuiyan (2015) market-to-book ratio over a 10-year period. also attributed the large number of interlocked directors in Fich and Shivdasani (2006) reported similar results for New Zealand to a shortage of qualiﬁed and independent busy non-executive directors in the US. They warned that if directors. non-executive directors held three or more board positions Scholars such as Kaczmarek et al. (2014) posited that they could become overcommitted and their monitoring board diversity could act as a moderator of the interlock- ability could decrease. Liu and Paul (2015) reported that ing–ﬁrm–performance relationship, particularly when try- the negative effects of busyness are even more pervasive ing to reconcile the busyness and experience hypotheses. for executive directors than for non-executive directors. These authors also asserted that there is considerable The relationship between corporate governance and the potential for the dissemination of ideas when companies social networks of 1600 directors of selected listed German are intertwined. Knowledge exchange is partly facilitated companies between 2003 and 2006 was examined by by the level of and changes in board diversity. Diverse Andres et al. (2013). These authors found that companies directors could make valuable contributions to boards. with well-connected directors experienced lower market- They should, however, be aware of the risks of becoming based ﬁnancial performance (as measured by Tobin’s Q) ‘‘over-stretched’’ by serving on too many boards and paid their executives a higher salary than companies simultaneously. with fewer interlocked directors. They ascribed their ﬁnd- ings to the poor monitoring ability of directors being too embedded in social networks. They added that possible Research design and methodology overboardedness should be considered prior to the nomi- nation of board candidates. In this respect, nomination It is evident from the literature review that, although committees have a considerable inﬂuence on the compo- director overboardedness can be regarded as a managerial sition of directorates (Ruigrok et al. 2006). challenge, multiple directorships can also offer several advantages to directors and the companies where they The relationship between board diversity serve. Given limited academic enquiry into the topic of and overboardedness director overboardedness in South Africa, an exploratory study was undertaken. Primary data were collected by As explained earlier, director overboardedness can be conducting semi-structured interviews with 10 directors of ascribed to several factors, including the size of the com- JSE-listed companies. The researchers used their judge- pany, and the beneﬁts of directors gaining prestige and ment to identify suitable research participants. These par- access to social networks. Pressure on companies to ticipants’ eligibility was measured in terms of experience, improve their board diversity may also play a role, as categorisation (executive or non-executive director), age, companies are increasingly required to diversify their ethnicity, gender and type of industry in which their directorates’ composition. In Norway, for instance, listed respective companies conducted business. companies are obliged to appoint female directors to reach The interview guide consisted of open-ended questions. a quota (Ahern and Dittmar 2012), while the UK legislator Biographic information was requested followed by 214 N. Mans-Kemp et al. questions related to the causes and consequences of Deﬁnitions provided by participants included ‘‘overboard- director overboardedness. Both the advantages and disad- edness occurs when directors sit on numerous boards and vantages of the busyness and experience hypotheses were are unable to properly fulﬁl their duties’’; ‘‘directors who encapsulated in the questions. Seven interviews were are spread too thinly due to taking on too many board conducted in person and three via Skype between June responsibilities’’; and ‘‘when individuals are represented on 2017 and April 2018. The interviews were voice-recorded too many boards and it then has a negative impact on their and then transcribed. Data analysis comprised a descriptive effectiveness’’. From these deﬁnitions, it was evident that overview of the sample’s characteristics, followed by a the interviewees had fairly negative connotations of the thematic analysis (Braun and Clarke 2006). Thematic phenomenon. analysis is commonly used to identify themes when com- Several participants perceived some local directors as paring the responses gathered from interviews. being overboarded. Williams et al. (2016) conﬁrmed that To protect the anonymity of the interviewees, an over- the South African director network includes several indi- view of the sample’s demographic characteristics is pro- viduals who serve on multiple boards at the same time. vided, instead of offering details on each individual’s Three participants, however, cautioned that the term demographic proﬁle. The least experienced interviewee ‘‘overboardedness’’ should not be generalised by implying had been a director for 8 years, whereas the most experi- that all directors with more than one board position are enced interviewee had served on the boards of JSE-listed overboarded. According to them, overboardedness should companies for 44 years. The sample included an equal be assessed on a case-by-case basis. In support of this view, number of executive and non-executive directors. The one interviewee stated that ‘‘if you serve [on the board] of a participants’ ages ranged from 34 to 69. An equal number listed company and [its] committees, it takes up time but of black and white participants, and males and females having said that, some people do not do anything except sit were included in the sample. on boards for a living’’. The interviewees served on the boards of companies Another participant added that some directors are cap- doing business in the industrial, consumer goods, consumer able of dealing with more responsibilities than others. services, ﬁnancial, technology and telecommunications When evaluating overboardedness, attention should thus be sectors. On average, the interviewees served on approxi- given to a director’s number of board positions at both mately two boards of listed and three boards of unlisted listed and unlisted companies, and their ability to manage entities, based on their board positions at the time when the the associated responsibilities. These views relate to the interviews were conducted. The maximum number of literature (Clements et al. 2015; Lee and Lee 2014) which board positions that an interviewee held at the same time states that corporate context and individual circumstances was four listed companies and nine unlisted companies. should be taken into account when assessing The interviewees simultaneously served on between one overboardedness. and ﬁve board committees. Pertaining to credibility and conformability, the ques- Possible causes of overboardedness tions posed were based on academic sources reported in the literature section and the ﬁndings were linked to the liter- The second theme that emerged from the data analysis ature where applicable. The authors aimed to ensure that centred on the possible causes of directors overboarded- the participants’ views were accurately reﬂected by reading ness. Three possible reasons were identiﬁed in the local through the interview transcriptions several times. Prior to context, namely the limited pool of eligible board candi- the research, ethical clearance was obtained from the uni- dates, board transformation requirements and ﬁnancial versity’s research ethics committee. rewards. According to the data provider Inoxico (2013), the over- utilisation of the relatively small pool of skilled directors is Findings and discussion a real challenge in South Africa. Several participants in this study also emphasised the country’s limited talent pool as Six themes were identiﬁed. These themes are discussed in contributing to interlocking, especially pertaining to eligi- the following sections. ble non-executive directors. One participant pointed out that ‘‘everyone is drawing from the same small pool and Awareness of overboardedness in the South African when you ask a company if they would mind overboard- context edness versus having the right skills and experience on the board, they would generally rather deal with overboard- The majority of participants were familiar with the phe- edness’’. In New Zealand, Roudaki and Bhuiyan (2015) nomenon of director overboardedness or interlocking. Exploring the causes and consequences of director overboardedness in an emerging market 215 also ascribed overboardedness to a shortage of qualiﬁed, of the nomination committee to assist and develop such independent directors. directors was emphasised. A participant hinted that it is ‘‘difﬁcult to put a director An alternative view was raised, namely that competition in a listed entity as a ﬁrst-time board appointment’’. Such among companies might limit the number of board posi- directors often require extensive development. This par- tions held by sought-after diverse candidates. One of the ticipant added that there were companies that were indeed interviewees remarked that ‘‘in most industries you have a appointing and developing inexperienced directors. few signiﬁcant players and as soon as you are associated According to this participant, the pool was thus growing, with one of those groups you are disqualiﬁed from being albeit at a slow pace. Researchers in emerging markets involved in other groups. So it is not just the limited pool, it likewise suggested that a limited talent pool might con- is [also] the competitive situation that you are in’’. tribute to overboardedness (Jackling and Johl 2009; Sarkar In line with the literature, notably Kaczmarek et al. and Sarkar 2009). (2014) and Hafsi and Turgut (2013), several interviewees One director remarked that ‘‘if you follow the careers of recommended that other board diversity elements such as most of the sought-after diverse candidates, it is amazing to experience, educational background and age should also be see how their number of boards grows’’. An interviewee, taken into account in addition to ethnicity and gender when who believed that the local talent pool was ‘‘very small’’, directors are appointed. One participant remarked that an explained that this pool historically comprised a majority age differential was of particular importance in certain of mature white males ‘‘who served on several boards and areas, and that ‘‘you might need to stay up to date in fast- who all knew each other’’. However, according to him, the moving industries such as technology’’. This view is sup- dynamics was changing to include diverse candidates, ported by Barrett (2017) who found that information especially ‘‘younger black females’’. Research by Mans- technology ﬁrms had, on average, the youngest directors of Kemp and Viviers (2015) conﬁrms that the number of all considered S&P 500 companies. black and female directors serving on the boards of JSE- Reference was also made to the monetary beneﬁts listed companies has increased signiﬁcantly since 2002. associated with holding multiple board positions, as one Further changes in board ethnicity and gender diversity can participant remarked: ‘‘Some people take as many [direc- be expected in the light of the King IV Report’s recom- torships] as you offer them because of the money’’. This mendations on board diversity (IoDSA 2016). view concurs with Andres et al. (2013) who found that One director remarked that the incorporation of board substantial monetary beneﬁts encourage directors to accept diversity requirements in the JSE listing requirements (JSE several board positions. In addition, the local media has 2017) left public companies with no other option than focused on the controversial topic of excessive executive compensation as it has been revealed that executives to change. A counterpart, however, warned that ‘‘imposing board diversity agendas can be to the detriment of skills if earned almost 500 times more than the average South unqualiﬁed [incompetent] individuals are hired only to African employee (Lu and Melin 2016). meet diversity requirements’’. Another interviewee, however, claimed that not all An interviewee noted that black females were especially directors are driven primarily by ﬁnancial rewards. He in high demand as they could contribute to both board indicated that some individuals accepted more non-exec- ethnicity and gender targets: ‘‘As soon as you know of one utive positions ‘‘to stay connected and to coach and mentor [deﬁned by the participant as a black female] and she is younger directors’’. The support of a seasoned mentor competent, the news spreads like wild ﬁre and she gets could enable a promising, diverse candidate to develop the appointed to nearly every board’’. Another interviewee perspectives and vision that are needed to reach their full warned that experienced female directors would become potential (Clutterbuck and Megginson 1999). even more overboarded unless more females were trained and more board opportunities were offered to increase the Directors’ views on the experience hypothesis talent pool. Participants’ views were gauged on the phenomenon of Several participants mentioned beneﬁts of overboardedness so-called token director appointments. In line with the that could be linked to the experience hypothesis and ﬁndings of Nyirenda (2010), a number of participants resource dependence theory. One mentioned that multiple acknowledged that certain board appointments were made board memberships indeed ‘‘help[ed] with efﬁciency and based on ethnicity or gender, but that this practice was familiarity’’. Other positive remarks included the follow- decreasing. Other participants, however, remarked that ing: ‘‘Directors who serve on many boards have a broad inexperienced, diverse individuals were sometimes regar- range of experience and they can apply their learning from ded as tokens when appointed to their ﬁrst board. The role other boards to your company’’ and ‘‘you are tapping into one source with multiple points of reference [multi- 216 N. Mans-Kemp et al. boarded director] into the economy, [and] into different their board responsibilities (Clements et al. 2015). In line industries’’. Sarkar and Sarkar (2009) conﬁrmed that with this hypothesis, one participant went as far to say that interlocked directors could expand their access to social ‘‘if you have a board full of overboarded directors you are networks. Field et al. (2013) furthermore acknowledged on a sure road to disaster’’. He added that ‘‘in most cases that overboarded directors are often more experienced and you would not have more than two or three [overboarded better connected than their counterparts who serve on members] on a board in which case the other directors fewer boards. often carry the board’’. The view was also raised that overboarded directors are Considering their responses, it was evident that the not by implication unprepared for meetings and do not participants’ largest concerns pertaining to overboarded- necessarily give insufﬁcient attention to corporate matters, ness were excessive time commitments and insufﬁcient as suggested by the busyness hypothesis. An interviewee meeting attendance. A participant mentioned that by remarked: ‘‘I have seen non-executive directors who serve serving on too many boards, it might be challenging to on many boards contribute to our board the most in the ‘‘apply your mind’’, while another director said that ‘‘as past. The ﬁrst impression might have been that the indi- soon as you see someone with a poor attendance record that vidual served on too many boards, how is he possibly going would be a very big red ﬂag’’. Jiraporn et al. (2009a) to add value to our board? The reality has turned out to be conﬁrmed that board members who hold multiple positions the opposite’’. She concluded that ‘‘it depends from indi- at the same time have a tendency to miss board meetings. vidual to individual as to how committed, focused and Some participants furthermore cautioned against agree- professional they are. Some people would self-manage ing to serve on several challenging board committees, whether they are overboarded or not’’. Overboardedness particularly audit committees. A participant remarked that should hence be assessed on a case-by-case basis. ‘‘audit committees require a lot of work and if you do not Another participant conﬁrmed that companies can ben- spend the time going carefully through the papers you are eﬁt considerably from tapping into a multi-boarded direc- not going to ask the right questions; you are not going to tor’s wealth of experience and knowledge by stating that engage with the management or the internal or external ‘‘if something works in one company and it is efﬁcient, it audit and you run a severe risk of not actually doing your very quickly spreads across to other entities’’. As such, best job’’. These views are supported by the ﬁndings of Jiraporn practice could be adopted across the companies which a et al. (2009b) that an increase in overboardedness decreases director represents. This participant, however, warned the likelihood of a director serving on compensation and against ‘‘pooled thinking’’. Colaco et al. (2011) also cau- audit committees. tioned against so-called groupthinking, arguing that board The participants also pointed out that it was challenging for them to coordinate diaries to accommodate several heterogeneity enhances decision-making by increasing access to multiple points of view. As boards become more board and committee meetings. Board meetings are typi- diverse, the propensity of directors thinking and acting in cally scheduled annually in advance and attempts are made the same way diminishes. to resolve issues. Unavoidable clashes might, however, Four participants were of the opinion that overboard- negatively affect attendance records. A participant edness would not have a negative impact on ﬁnancial remarked that ‘‘for the most common board meeting performance. They mainly based their view on the per- months, those people [directors holding multiple board ceived competencies of the executive team. One of the positions] are being stretched immensely’’. participants believed that ‘‘the day-to-day running of the A counterpart argued that attendance fees encouraged company is handled by the executive directors, so you directors not to miss meetings. He explained that board would expect them to be prudent’’. Another participant meeting attendance are ‘‘usually extremely high, but we all summarised the possible beneﬁts related to director inter- know that you are not a director for 3 h, four times a year; locking as follows: ‘‘I think the concept of serving on more you are a director every single day of the year. So based on than one board is a positive one but certainly once it goes attendance, I do not think it impacts attendance because the beyond a point where you can really put the effort in, then calendar is agreed a year before the time’’. He continued by it becomes a problem’’. Negative outcomes as postulated saying ‘‘whether directors sit on ﬁve boards or 20 boards by the busyness hypothesis might then arise. they all coordinate their calendars and they make sure they attend because that is the thing that is being recorded. Also Directors’ views on the busyness hypothesis the JSE is on a drive to say no to annual retainer fees. So with a per attendance fee, directors are attending’’. As explained earlier, the busyness hypothesis postulates In line with the busyness theory, the majority of the that multi-boarded directors could become overcommitted interviewees indicated that overboardedness might indeed and could ﬁnd it difﬁcult to give sufﬁcient attention to all contribute to poor corporate governance. Participants Exploring the causes and consequences of director overboardedness in an emerging market 217 added that the quality of meeting preparation and directors’ considering personal and corporate circumstances. They willingness to stay updated, however, diminished the hence opposed regulation on multiple directorships, as one negative impact of overboardedness on corporate gover- director explained: ‘‘I do not think there is a magic number nance. Although some international researchers (Kacz- as it depends on the individual and the companies con- marek et al. 2014; Fich and Shivdasani 2006) reported that cerned and the board members’ familiarity with the boards with many busy directors were associated with industries in which these companies are’’. insufﬁcient corporate governance and ultimately poor Recommendations pertaining to the maximum number ﬁnancial performance, Chiranga and Chiwira (2014) noted of board positions that should be allowed differed. The no signiﬁcant association between multiple directorships opinion was raised that executives would struggle to attend and ﬁnancial performance for selected South African to more than one or two additional board positions. The directors over the period 2006–2012. size of the company on whose board directors served was One of the interviewees expressed the view that expe- also mentioned as a determining factor: ‘‘If you take board rience does not necessarily mean that a director will make positions at substantial [large] companies, you can maybe valuable contributions: ‘‘One could argue that experienced serve on two or three boards’’. Another interviewee con- directors do not need to spend hours reviewing board cluded that ﬁve or six directorships could be held if the packs, because they know what the ﬁnancials look like, but boards were small and had simple structures. Previous that is where the risk lies’’. Experienced directors might authors (Fich and Shivdasani 2006; Ferris et al. 2003) become ‘‘too complacent about what they are doing’’. regarded directors overboarded if they served on more than An experienced director explained that travel require- three boards. ments and industry familiarity could also play a role in the Five interviewees agreed that the future King V Report number of directorships that a director could deal with should include a section on directors serving on multiple effectively. He described board meetings abroad as being boards to offer more guidance, but that it should not pre- ‘‘more difﬁcult to attend’’ than local meetings. He was also scribe a speciﬁc limit. They were in favour of a principles- of the opinion that a new board position would be easier to based approach that allows ﬂexibility considering each manage if it were in a familiar industry, since ‘‘a direc- company’s and director’s circumstances. Participants also torship in a new industry takes a fair amount of time to opposed the regulation of director interlocking, given understand’’. This view is in agreement with Clements South Africa’s limited pool of eligible board candidates et al. (2015) who documented a decrease in corporate and the need to diversify directorates. governance compliance when directors of small ﬁrms increased board memberships in unrelated companies. Mechanisms to manage overboardedness Another theme that emerged from the data analysis centred on participants’ suggestions for addressing director The participants highlighted that nomination committees overboardedness in South Africa. and board evaluations could play a signiﬁcant role to manage overboardedness and to address related concerns. The way forward in South Africa In line with Kiel and Nicholson (2006), the interviewees recommended that all board positions held by an individual The majority of the participants acknowledged the positive should be discussed during board and individual director change in the philosophy of the King IV Report to a more evaluations. By undertaking such regular and rigorous outcomes-based approach with fewer principles in com- evaluations, directorates have a mechanism to guard parison with King III. The King IV Report encourages against over-commitment and to address insufﬁcient per- directorates to apply ‘‘integrated thinking’’ to reﬂect on formance by individual board members (Kiel et al. 2005). how the principles apply to their organisations (IoDSA A participant explained that the results of the annual 2016). Although no pertinent guidelines are offered on board performance reviews are presented to each director director overboardedness in King IV, one interviewee and the nomination committee. If a board member is found believed that the King Committee is inadvertently to be overcommitted, the issue needs to be resolved before attempting to address the overboardedness issue. The King the following re-election. Another counterpart conﬁrmed IV Report recommends that non-executive candidates that before recommending directors for re-election, his should provide details regarding their professional com- company’s nomination committee evaluates whether these mitments and conﬁrm that they have enough time to fulﬁl directors ‘‘are actually devoting enough time’’, whether their responsibilities (IoDSA 2016). they are ‘‘performing’’ and whether they are doing ‘‘what Most of the participants believed that it was challenging they are supposed to do’’. He regarded meeting attendance to make a rule that would limit the number of board records as ‘‘hard evidence’’ in this regard. positions that an individual director could hold, without 218 N. Mans-Kemp et al. Several participants in this study agreed with Andres make valuable contributions to companies and ultimately et al.’s (2013) suggestion that the possibility of over- enhance their ﬁnancial performance. boardedness should be considered before nominating board In line with the busyness hypothesis, the participants in candidates. One participant remarked that ‘‘possible over- this study conﬁrmed that overboardedness was a concern boardedness should be a fundamental discussion point for for some JSE directors. They stressed the negative out- the nomination committee when recruiting new directors’’. comes of overboardedness, such as becoming overcom- However, the majority of interviewees reported that they mitted and being unable to fulﬁl their responsibilities. had never formally discussed overboardedness during Insufﬁcient meeting attendance was also mentioned. board and/or board committee meetings. However, the interviewees also highlighted several The participants also offered several recommendations advantages related to the experience hypothesis. Multi- to expand the talent pool in South Africa in an attempt to boarded directors could offer invaluable advice and expand curb overboardedness. The responsibility of companies to a company’s access to social networks. take action in this regard was highlighted. Participants Some participants mentioned that a diligent individual recommended that more formal training and education could give sufﬁcient attention to board responsibilities and should be provided to board candidates. Suggestions were make a valuable contribution despite serving on multiple also made to elect ‘‘younger persons’’ to subsidiary boards boards. They hence argued that overboardedness should and to introduce junior directorates to the boards of non- not be generalised and that such instances should be con- proﬁt organisations where they can gain experience. Junior sidered on a case-by-case basis. Travel requirements, boards are typically used in non-proﬁt organisations, experience, capabilities and industry knowledge could play allowing young professionals to express their views and an important role in determining the number of director- insights while being mentored (BoardAssist 2015). ships that an individual can successfully manage. The role of director recruitment agencies was also Three possible reasons for overboardedness were iden- mentioned. A participant noted that these agencies were tiﬁed, namely the limited pool of eligible directors in South ‘‘not bringing new people to the table’’. Recruitment Africa, board transformation targets and monetary beneﬁts. agencies could source board candidates beyond the tradi- Participants remarked that companies were competing to tional local circles, e.g. from academia and abroad. Other attract the same limited number of board candidates. They interviewees mentioned that professional industry associ- stated that regulation that limits multiple directorships ations, such as the South African Institute of Chartered might strain the ability of boards to function effectively. Accountants and the South African Property Owners Such restrictions could also hamper companies’ ability to Association could introduce promising board candidates to diversify their boards. Interviewees furthermore mentioned companies. Two interviewees furthermore recommended that some individuals primarily accepted more board that more business schools should offer training pro- positions to beneﬁt ﬁnancially. grammes for aspiring board candidates. Participants offered several suggestions to increase the pool of eligible board candidates, including more training and education initiatives for promising, diverse candidates. Conclusions and recommendations Companies could allocate more time and resources to train board candidates. Recruitment agencies could also play a The agency and resource dependence theories have been more prominent role in expanding the talent pool by inter employed by previous researchers to investigate director alia sourcing new directors from academia and abroad. overboardedness. The experience hypothesis predicts that They could also invite talented directors who are ending director interlocking enhances companies’ access to social their executive careers to continue their careers as non- networks, expertise and other resources. In contrast, the executive directors. Such individuals could serve as men- busyness hypothesis relates to the agency theory and pos- tors to inexperienced and young candidates. Board targets tulates that overcommitted directors are not effective for ethnicity and gender diversity might further encourage monitors. companies to develop eligible individuals who could be Researchers in developed markets reported conﬂicting nominated for board positions in future. results on the relationship between director overboarded- As part of the director recruitment criteria, nomination ness and ﬁnancial performance. 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Exploring the causes and consequences of director overboardedness in an emerging market

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Exploring the causes and consequences of director overboardedness in an emerging market

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