In recent years, director commitments policies have become more prevalent at U.S.-based companies. Director commitments policies can reduce risks stemming from potentially overcommitted directors, facilitate active board refreshment and ensure that a board engages in thoughtful dialogue around director time commitments. Many institutional investors are incorporating director commitments policies into their evaluation of directors and proxy voting guidelines, and in response companies are increasingly implementing them.
In this post, we follow up on our prior analysis with a review of the increased adoption of director commitments policies over the past year and the evolution of their design and disclosure.
Methodology
In our review, we examined how director commitments policies have changed since 2023 by analyzing a random sample of fifty S&P 500 companies and their disclosed policies. We reviewed each company’s 2023 and 2024 proxy statements, corporate governance guidelines, and/or nominating committee charter and assessed their director commitments policy, relying on the most recent publicly available data. If there was: (i) no reference to a director commitments policy in a company’s 2023 proxy statement; and (ii) the corporate governance guidelines or nominating committee charter was updated after the 2023 annual meeting, we treated such disclosure as if the policy was adopted following the meeting.
Increased Adoption of Director Commitments Policies
According to our data for the 2024 proxy season, we found that nearly three-in-four Russell 1000 companies (73.5%) disclosed a director commitments policy that specifically limits the number of outside boards on which a director may serve, representing a 3.5% increase from 2023. We previously reported that 85% of Russell 1000 companies had a policy, but only 70% of those policies included numerical limits.
Of the 50 companies in our sample, 19 did not have a director commitments policy in place during 2023. As of November 2024, 13 of these companies have adopted a director commitments policy, representing a notable 26% increase in disclosure of such policies in our sample. Some of this increase may be due to companies refining and adding to their already existing policies to add a numerical limit, if they did not previously specify one, but overall it appears such policies are becoming more widely adopted.
This analysis indicates that director commitment policies are becoming a market best practice. At S&P 500 companies, we found that 82% disclosed a director commitments policy. Generally, S&P 500 companies tend to demonstrate increased responsiveness to investor concerns and corporate governance best practices, and often set the standards for disclosure trends that later spread to the wider market.
Evolution of Director Commitments Policies
While each company’s policy is designed to suit their specific needs, there are certain common features relating to policy limits and application. Of the 44 policies disclosed by our sample companies, non-employee director (NED) commitments were restricted to three external boards by nearly 64% of companies, with the highest overall limit set at five external boards. In addition, certain policies may further limit CEOs and/or other executives to one or two external boards. Approximately 15 of the policies disclosed in our sample applied a specific limit to CEOs, and 25 policies applied a specific limit to all public company executives.
In addition to CEO- and executive-specific limits, many policies also applied specific limits for directors that serve on audit committees. Audit committees are generally responsible for risk oversight, and as new risk factors have emerged, including AI governance and cybersecurity, investor concern on the potential strain on audit committee members has increased. Approximately 41% of director commitments policies disclosed by our sample companies contained audit committee-related provisions. In each case, this limit was set at two external audit committees. The inclusion of audit-related director commitments policies demonstrates boards’ responsiveness to investor concerns and provides boards a proactive approach to mitigate risk.
Variations of Director Commitments Policies
Further, it is not just the commitment limits that varied between the policies. In our review, two of the 13 newly adopted policies included “softer” language that allows boards more flexibility compared to other policies. For instance, certain policies use language such as “directors should generally not serve on more than three other public company boards” (CF Industries Holdings, Inc., DEF14A, 03/07/2024, Pg. 18). Comparably, other policies contain stricter provisions such as “if a director…exceeds the public company limits set forth above, such director shall commit to reduce the number of such directorships in order to fall within such limits within 12 months” (Boeing Co, DEF14A, 05/05/2024, Pg. 10). The first example serves as a guideline while the second provides a more stringent limit.
Providing the board some degree of discretion is another common feature. Approximately 66% of disclosed policies included a means for granting exceptions. Generally, such provisions either: (i) provided an explicit way for the board to grant an exception; (ii) required directors to notify and seek approval from the board before joining additional boards; and/or (iii) required the nominating and corporate governance committee to evaluate directors’ commitments and their impact on directors’ current board service. Director commitments policies that do not provide for exceptions may be better suited for companies that intend to use these policies as a means to facilitate active board refreshment, while those with exceptions provide for more flexibility and board discretion.
Impact on Board Refreshment and Director Commitments
Of the 44 companies in our sample that disclosed director commitments policies, 15 underwent board refreshment and/or had directors who reduced their commitments since 2023. Notably, the departing directors were all those with the highest number of directorships on the boards they departed.
In our sample, all directors were in compliance with their respective companies’ policy, with the exception of Egon Durban at Motorola Solutions, Inc. As disclosed in Motorola’s corporate governance guidelines, the company maintains a director commitments policy with a limit of five total board memberships for NEDs. During 2023, Mr. Durban served on six boards, exceeding the policy’s limit.
In Motorola’s 2023 proxy statement, the company stated that “all director nominees other than Egon Durban [were] compliant with the Director Commitment Policy…” and following certain transactions, Mr. Durban was “expected to become compliant with the Director Commitment Policy by the end of [the] calendar year.” Subsequently, the company disclosed in its 2024 proxy that Mr. Durban was not nominated for re-election. While Motorola did not disclose that the decision was directly a result of their director commitments policy, it appears that the company’s policy is driving thoughtful conversations around their director’s commitments.
Conclusion
The ability of directors to dedicate sufficient time to provide effective oversight at the boards on which they serve will continue to be a primary investor concern in the context of an expanding risk environment.
Following the emergence of director commitments policies as an effective tool for boards, more companies are implementing them into their own governance practices. These policies may lead directors to reduce commitments and/or seek board approval prior to joining additional boards, in addition to promoting refreshment and an active and engaged board. Furthermore, the implementation of director commitments policies in addition to other tools, such as board skills matrices, may lead to more effective and well-rounded boards, strengthening companies’ oversight capabilities and helping to protect shareholder value.
While the design and use of director commitments policies may vary, companies that implement director commitments policies establish a standard of accountability and acknowledge investor concerns surrounding the risks posed by overcommitted directors.
Sarah Wenger and Aaron Wendt contributed to this report