“Overboarding,” Lack of Board Diversity Emerge as Governance Battlegrounds

As one of the largest asset managers in the world, BlackRock has leveraged its position in recent years to encourage better corporate governance and a greater sense of social responsibility. Its newest cause célèbre: CEOs sitting on too many corporate boards.

A new report from the institutional investor showed that during proxy season, BlackRock voted against nearly 100 CEOs who were running for re-election on corporate boards outside of their own companies. The votes made good on BlackRock’s promises to take a hard look at situations in which board directors may be overextended. According to BlackRock’s 2019 proxy voting guidelines for U.S. securities, it would “consider voting against committee members and/or individual directors” in scenarios in which the candidates are on “an excess number” of corporate boards. The guidance limited CEOs of public companies to sitting on just one corporate board in addition to their own.

BlackRock has publicized its concerns about overcommitted directors before. Last year, for instance, the company spoke up about so-called overboarding. BlackRock’s actions spoke louder this year, though, as its no votes on CEO nominations roughly tripled from 32 in 2018 to 94.

Concerns about overboarding aren’t just limited to BlackRock. For example, the latest proxy voting guidelines of investment houses Vanguard and State Street Global Advisors lay out a variety of rules for opposing nominations of executives who sit on multiple corporate boards. The same goes for proxy advisory firms Glass Lewis’ and ISS’ US voting guidelines. (According to Glass Lewis, “an overcommitted director can pose a material risk to a company’s shareholders, particularly during periods of crisis.”)

Recent corporate disclosures reveal how overboarding concerns are playing out in real life. Last week, Tractor Supply Co. CEO Greg Sandfort stepped down from the board of Kirkland’s Inc. Sandfort, who also serves on the board of WD-40 Company, cited institutional investors’ discomfort with CEOs holding more than one outside board position. Meanwhile, CalPERS notified TG Therapeutics Inc. in May of its concerns over CEO Michael Weiss’ three other directorships in addition to his spot on the TG board.

In other cases, companies are defending directors who are believed to be overextended. For example, Lions Gate Entertainment Corp. and Jazz Pharmaceuticals PLC both addressed overboarding concerns in filings this summer with the Securities and Exchange Commission.

BlackRock noted in its report that its votes against non-CEO directors based on overboarding issues have dropped steadily since the 2015-2016 reporting period. Assuming that’s a sign of independent directors cutting back on their board commitments, it seems likely that a similar trend will follow in the ranks of chief executives.

Diversity shortfall

BlackRock’s 2019 proxy voting record also reflected its calls for more diversity on corporate boards. The investment firm voted against nominees at more than 50 companies in the Russell 1000 index that failed its diversity litmus test.

Interestingly, BlackRock’s diversity policy mirrors recent efforts in California to promote more female members on corporate boards. Last year, Democratic Governor Jerry Brown signed into law legislation mandating that public companies based in the state have at least one female director on their boards by the end of 2019. The law calls for even more female representation on boards by 2021.

Rightwing activist group Judicial Watch has filed a lawsuit charging that the California law violates the state’s constitution, so it’s entirely possible that it won’t survive the courts. Even so, if other major investors follow BlackRock’s lead on proxy voting, it won’t take an actual law to make diversity a much larger priority for corporate boards going forward.

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