ECGS voting policy on director elections: ‘Overboarding’ in the Nordic Countries

In a recent McKinsey & Company survey on corporate boards, non-executive directors (“directors”) said they spent more time now fulfilling their board duties than ever before.[1] On average, the number of days (per year) directors devote to board work per mandate has increased from 28 in 2011 to 33 in 2015. Moreover, it is estimated that many board members are spending 50 days or more per year on board work either due to regulatory pressure or simply owing to the fact that the time required to do a good job is usually more than directors initially expect[2]. Hence, it is of vital importance that investors should be assured that directors have sufficient time available to devote to the boards on which they serve whether it be under ordinary circumstances (‘peacetime’) or in the event of exceptional circumstances (‘times of war’).

Regulation

All corporate governance codes in the Nordic Countries contain statements of a more general nature regarding the consideration of overboarding when assessing individual directors.

 

Each director assesses the expected time commitment for each function in order that the member does not take on more functions than he/she can manage satisfactorily” and “a director who is also a member of the executive management of a company, should generally not take on more than a few non-executive directorships or one chairmanship and one non-executive directorship in companies not forming part of the group” (Denmark)[3];

 

"When assessing the sufficiency of the time an individual director is able to devote to the duties of a director, the director’s main occupation, secondary occupations, and simultaneous board memberships and positions of trust, inter alia, shall be taken into account” (Finland[4];

 

In addition to having the appropriate expertise, it is important that the board of directors has sufficient capacity to carry out its duties. In practice, this means that each member of the board must have sufficient time available to devote to his or her appointment as a director. Holding a large number of other board appointments, for example, may mean that a director does not have the capacity necessary to carry out his or her duties in the particular company. The commitment involved in being a member of a board can vary from company to company, and it is therefore not appropriate to set an absolute limit for the number of board appointments an individual should hold. However, directors who hold a number of board appointments should at all times bear in mind the risk of conflicts of interest between such appointments” (Norway) [5]; and

 

Directors are to devote the necessary time and care, and to ensure they have the competence required, to effectively safeguard and promote the interests of the company and its owners. Each director is to act independently and with integrity in the interests of the company and all of its shareholders” (Sweden) [6]

 

ECGS guidelines

Under its current guidelines, ECGS deems it excessive when the number of significant positions held by non-executive directors or supervisory board members exceeds:

· Five non-executive positions; or

· One executive position and one (external) non-executive position.

Significant external positions include executive or non-executive positions at listed companies or large national and/or international organizations. When assessing the impact of cumulative mandates on workload, ECGS will pay particular attention to audit committee work commitments. Moreover, any Chairmanship in listed companies will always be counted as an equivalent of two board memberships.

 

Local market practice

In the Nordic countries prevailing market practices are not conducive to the strict application of the above-mentioned ECGS guidelines. Whereas all Danish and Norwegian companies currently have individual elections, all Finnish - and about one-third of the Swedish companies still apply bundled elections (see also table 3 below). Table 1 presents some figures on the number of ‘overboarded’ directors in the Nordic Countries.

Table 1: (‘Overboarded’) directors in the Nordic Countries 

 

Denmark

Finland

Norway

Sweden

Number of ‘overboarded’ directors

21

9

10

42

Size of sample (total number of directors in the sample)

[7]

128

113

59

225

% of directors considered ‘overboarded’

16.4%

8.0%

16.9%

18.7%

 

As illustrated above, the number of ‘overboarded’ directors still is significant in Denmark, Norway and Sweden. Anywhere between 15% and 20% of the total number of directors in said countries is considered ‘overboarded’ under ECGS guidelines. Table 2 shows some statistics on the (two) different types of ‘overboarding’ referred to in the ECGS guidelines.

Table 2: ‘Overboarding’ characteristics according to ECGS guidelines in the Nordic Countries

 

Denmark

Finland

Norway

Sweden

Number of ‘overboarded’ directors

21

9

10

42

> One executive position and one (external) non-executive position

14

4

6

19

> Five non-executive positions

7

5

4

23

 

As presented above, the two types of ‘overboarding’ are almost evenly distributed in Finland, Norway and Sweden. In Denmark however, the first type - exceeding one executive position and one (external) non-executive position - is significantly more common. A possible explanation for this can be found in the description of the Danish Recommendations on Corporate Governance (“the Danish Code”) which stipulates that: “a director who is also a member of the executive management of a company, should generally not take on more than a few non-executive directorships or one chairmanship and one non-executive directorship”. Therefore, the Danish Code is less strict than ECGS guidelines. Table 3 presents some characteristics on ‘overboarded’ directors and bundled elections in the Nordic Countries.

Table 3: ‘Overboarded’ directors and bundled elections in the Nordic Countries

 

Denmark

Finland

Norway

Sweden

Number of companies with at least 1 ‘overboarded’ director

15

8

8

25

% of companies with at least 1 ‘overboarded’ director

83.3%

53.3%

88.9%

86.2%

Number of companies with bundled elections

0

15

0

10

% of companies with bundled elections

0.0%

100.0%

0.0%

34.5%

Number of companies with ‘overboarded’ directors that have bundled elections

0

8

0

8

Size of sample (total number of companies in the sample)

18

15

9

29

 

As illustrated above, the proportion of companies with at least 1 ‘overboarded’ director is considerably high in the Nordic Countries. More than half of the Finnish companies in our coverage have at least 1 ‘overboarded’ director. In Denmark, Norway and Sweden this is even substantially higher with percentages above 80%. For example, in Norway and Sweden there are only one and four companies respectively, that have no ‘overboarded’ directors. [8]

 

ECGS voting policy

Over the past few years ECGS has opposed bundled elections in which there were three (3) or more ‘overboarded’ directors. This policy however has been slightly less strict when it concerned members of a company’s executive management (‘overboarding’ concerns have been solely addressed at the non-executive mandates) and women (typically the underrepresented gender in terms of gender diversity). In 2017, some examples of unfavorable ECGS recommendations on proposed bundled elections included: Alfa Laval AB, Atlas Copco AB, L E Lundbergföretagen AB and Nordea Bank AB. [9]

 

‘Overboarding’ is and remains an issue of concern in the Nordic Countries. Due to prevailing market practices, predominantly relating to the bundled form of director elections, it is not easy to tackle this issue and address it in a fair and coherent way. The ECGS approach has been and will be to oppose bundled elections in which there are three (3) or more ‘overboarded’ directors.

 

About ECGS

Expert Corporate Governance Service (“ECGS”) is a network of independent European proxy advisors and corporate governance consultancies. ECGS covers companies listed in the Euro STOXX 600 Index and advises institutional investors on topics relevant to investors. These include inter alia executive compensation, director nominations, capital issuances and dividend policies. ECGS updates its principles and guidelines on annual basis in order to continuously promote corporate governance best practices.

 


[1]

McKinsey Global Survey on corporate boards: Toward a value-creating board, McKinsey & Company, 2016.

[2]

Idem.

[3]

Danish Recommendations on Corporate Governance, May 2013 updated November 2014, provision 3.3.1.

[4]

Finnish Corporate Governance Code 2015, recommendation 8.

[5]

The Norwegian Code of Practice for Corporate Governance, October 30, 2014, provision 8.

[6]

The Swedish Corporate Governance Code, applicable from December 1, 2016, provision 5.

[7]

In the total number of directors included in the sample, employee representatives are excluded.

[8]

These companies include: Marine Harvest ASA (Norway), ICA Gruppen AB, Swedish Match AB, Telia Company AB and Volvo AB (all Sweden).