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Nov 29, 2015

Moderation in feasting and director seating

US Treasury and IRS threaten more regulation to hinder tax inversions while research suggests US directors are spreading themselves thinly

As the US prepares to commemorate Thanksgiving, I’m offering a couple of bite-sized governance items this week, as a reminder that you may want to adopt a similar approach when feasting tomorrow rather than going the whole hog – or whole bird, as the case may be.

First up, you’ve probably heard that the US Treasury Department and IRS intend to make tax inversions more difficult by issuing new regulations that would limit the ability of a US company to invert. This would apply where a US company is merging with a smaller foreign firm under a new holding company that will be tax-resident in a third jurisdiction, and where the former shareholders of the US company own at least 60 percent of the combined entity.

A client memo from Wachtell Lipton on November 20 would have us believe that choosing the best jurisdiction in which to incorporate a cross-border business combination is not always about the tax rate. ‘[It] typically involves a delicate balancing of many factors, including corporate governance, takeover defense, stock exchange listing and disclosure requirements, executive compensation, as well as US and foreign taxes,’ the memo notes. The approach taken by the Treasury’s latest notice ‘could limit the ability of parties to certain cross-border business combinations to select a holding company jurisdiction that is optimal for non-tax reasons.’

Meanwhile, the 2016 benchmark policy updates that ISS released on November 20 show the proxy adviser is continuing to cast a stern eye on director qualifications. In last year’s update, criteria for independence received additional scrutiny. This year, it’s how many boards a director serves on. The changes to ISS' overboarding policy in the US and Canada differ, raising a question about whether directors on Canadian corporate boards are viewed as having less capacity than US directors.

In the US, ISS is reducing the number of boards directors who aren’t currently CEOs can sit on before being considered overboarded from six to five, while in Canada ISS is lowering that number from six to four. For standing CEOs, the number of outside boards they can serve on will remain at two, while in Canada it’s being reduced from two to one. In both countries, the new policy is slated to be implemented in February 2017.

Does this reflect a belief within ISS that directors in the US can handle more than their Canadian counterparts? Or is it based on research showing different tolerances for director busyness between the two investor communities? Data cited by ISS offers a clue: the National Association of Corporate Directors’ 2014-2015 Public Company Governance Survey shows that director respondents now spend an average of 278 hours a year on board-related matters (including informal discussions with management), up more than 46 percent from 190 hours in 2005. In Canada, however, directors spend 304 hours on average on board service (388 hours for directors at companies with assets above C$5 billion), according to a 2014 study of 120 board chairs, directors and CEOs across Canada.

So what exactly is going on? The longer hours logged on Canadian boards suggest one of two things: either directors in Canada are more diligent or there are greater demands on them because of a more complex regulatory environment than in the US. Neither of these sounds very convincing. A third possibility is more likely: the average number of hours is considerably higher in Canada because directors there tend to serve on fewer boards to begin with, leaving them more time to devote to each board they do serve on.

By the way, the overboarding section of the ISS policy update includes a footnote that cites three research studies between 2008 and 2013, all of which show ‘a negative association between board busyness and company performance and director attendance at board meetings.’ ISS adds: ‘Notably, the authors of most of these studies define a busy director’s workload as three or more boards.’

Just like Thanksgiving celebrants, perhaps board members also need to be more careful about biting off more than they can chew. In the name of good governance, that is.

David Bogoslaw

Associate Editor and Online features producer for Corporate Secretary