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Board tenure: some thoughts

Is it fruitful to refresh a board only because directors have been at the job for more than a certain number of years? What criteria or rules should govern this approach to structure a board?

The (Canadian) Institute of Corporate Directors tries to shed light on the matter, outlining the two main factors usually brought forward by term limits proponents: (1)

  • First, boards would automatically renew their composition, in experience, skills, and also fresh ideas. This is at the base of activism, proxy advisors, and academics` pressure.
  • Second, independence is questioned when a director has been at the job for too long, (in France a director is not any more considered independent after 12 years in the job, and in the UK the company needs to explain why he/she is still independent beyond 9 years).

The ICD proposes though, that boards should not be forced by term limits regulation to automatically renew themselves; instead, they should use an auto-evaluation approach, out of which conversations with failing directors would take place, and also skills and experience renewal if needed. A term limit shouldn`t turn into a right to stay until the end. These evaluations would imply the use of skill matrices or similar tools, (see our post here (2)), the analysis of behavioral competencies; they could be both global or individual, and would help to improve the structure and dynamics of boards much better than term limits, even if voluntarily adopted by firms.

The State Street Global Advisors evaluated in 2014 its investee companies, in relation to board tenure, with the assumption that board tenure boards would not be able to refresh skills and industry expertise (at least not without increasing the board size), (3). Nevertheless, their policy only pursues to encourage long tenure boards to enhance their succession plans and to avoid tenured directors to lead or be members in the main “independent” committees, together with declassifying, (USA mainly).

Richard Leblanc exposed it differently in a September 2013 article, (4): he suggested directors could have a fiduciary duty to leave when their continued presence in the board could be considered not any more in the comnpany`s interest, but in his own.

On the other hand, (5) David Katz and Laura McIntosh published an article where they supported long tenure as an asset for the company, and their view that long tenure was not an obstacle to more diversity in the board, (both raising retirement ages and longer tenures had been coetaneous with the increase in diversity). They insist that the best positioned to judge whether directors are serving for too long periods is the board itself. They push for annual evaluations and self-assesments i order for boards to be capable of doing it. Which takes us to our starting point with the ICD, (1).

AS for the academic studies on boards tenure, Katz and McIntosh refer to a number of them, but I will include here a reference to Sterling Huang`s “ Zombie Boards: Board Tenure and Firm Performance”, (6) where he argues that the firm value function depends non-linearly from board tenure, so that an increase in long tenure has a positive effect on firm value, (learning curve, no isolation risk, etc), until a point from which entrenchment has a prevalent strength and curbs the declining learning effect. The study finds nine years is the optimal average tenure when firm value is analysed.

I guess the topic will continue to be one of the main in the debate around boards and corporate governance, which we welcome, as it is always certainly a passionate theme.

  1. See http://www.icd.ca/getmedia/e57f3478-2b5c-4f14-aad4-5aa8d6a7298d/15-1889-Beyond_Term_Limits_EN_Final.pdf.aspx, and http://blogs.law.harvard.edu/corpgov/2015/02/13/beyond-term-limits-using-performance-management-to-guide-board-renewal/.
  2. https://joaquinbarquero.wordpress.com/2014/07/21/directors-selection-and-recruitment-the-matrix-of-skills/
  3. See http://blogs.law.harvard.edu/corpgov/2014/05/25/board-refreshment-and-director-succession-in-investee-companies/, and “ Addressing the Need for Board Refreshment and Director Succession in Investee Companies “ by Rakhi Jumar.
  4. http://boardexpert.com/when-does-it-become-unethical-for-a-director-to-continue-to-serve/
  5. http://www.wlrk.com/webdocs/wlrknew/AttorneyPubs/WLRK.23346.14.pdf
  6. http://blogs.law.harvard.edu/corpgov/?s=board+tenure&submit=Go and Huang, Sterling, Zombie Boards: Board Tenure and Firm Performance (July 29, 2013). Available at SSRN: http://ssrn.com/abstract=2302917 or http://dx.doi.org/10.2139/ssrn.2302917
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