Director Over-boarding (Hong Kong & Singapore)

Background and Overview

In the absence of local laws or best practice code provisions that limit the number of board seats an individual may hold, multiple directorships are currently not considered by ISS when making a director-related vote recommendation in Hong Kong or Singapore.  While the average number of board seats held by a director is only 2.2 in Hong Kong and 2.5 in Singapore, a small number of directors in these markets sit on eight or more public company boards; and one director in Hong Kong sits on 16 boards.

With the increasing demands of board and committee service at public companies around the world, investors generally believe that limiting the number of board seats an individual holds is a sensible way to ensure that directors have the time and energy to serve effectively on each board.  Some academic studies have confirmed that "busy" directors correlate with lower shareholder returns, while even studies that showed a benefit from adding busy directors to a board – purportedly due to those directors' expertise and network of personal connections – defined "busy" as sitting on three or more boards; well below the threshold for considering a director to be "overboarded" under ISS policies for the U.S., Europe and Australia.

Key Changes Under Consideration

ISS is proposing to set a limit of six boards for directors at Hong Kong and Singapore companies, and recommend votes AGAINST directors who sit on more than six public company boards. This limit is in line with the definition of overboarding in the U.S. market, and also represents the whole number that is nearest to two standard deviations above the mean number of directorships in these markets.

Intent and Impact

ISS is proposing to establish this new policy to reflect investors’ negative sentiment toward overboarded directors as well as to align the policy with voting guidelines in other markets. The threshold of six board seats was set to trigger against recommendations only for an outlier within the market, and this threshold is greater than two standard deviations away from the mean based on the number of board seats held by directors in 2011-2012. Based on a sample of directors at core companies in Hong Kong and Singapore,  the threshold of six board seats will result in negative recommendations against 1.3 percent of directors (4.3 percent of independent directors) and 1.2 percent of directors (2.0 percent of independent directors) in Singapore. A large percentage of the companies in these markets have a controlling shareholder, and therefore few if any directors are expected to actually lose their board seats as a result of the policy change. Nevertheless, a significant negative vote is likely to put pressure on individual directors to avoid being overcommitted by serving on an excessive number of company boards.

Request for Comment

Please feel free to add any additional information or comments on the proposed policy change.  In addition, ISS is specifically seeking feedback on the following:

• Are there circumstances under which an overboarding policy should not be applied in Hong Kong and Singapore? If yes, please specify.
• Should the policy distinguish between non-independent directors, who sometimes sit on the boards of multiple public companies within a group, and independent directors, who are more likely to sit on the boards of unrelated companies? If yes, please specify.

To submit a comment, please send via e-mail to policy@issgovernance.com. Please indicate your name and organization for attribution. While ISS will consider all feedback that it receives, comments will not be published without attribution.

All comments received will be published as received, unless otherwise requested in the body of the e-mail submission.