Category: Board Composition

A Closer Look at the Emerging Debate Over Board Tenure

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Steven Haas

The appropriate length of service by a company director is an emerging issue in corporate governance that yields varying responses among large shareholders, proxy advisors, and directors themselves. Recent board tenure concerns center around a director’s ability to remain independent after extended service, lack of industry expertise and technological familiarity, and poor diversity on corporate boards. Conversely, long-tenured directors can be beneficial because of their deep knowledge of the company acquired through service, the continuity and stability they offer, and their grasp of the historical perspectives that can inform current company strategy. As this issue continues to draw attention from various interested constituencies, corporations should continually assess board composition and consider their current policies on director tenure as shareholders become more attuned to extended service and its implications.

The Current State of Director Tenure in the U.S. and Abroad

No overarching law or regulation currently limits the length of board service in the United States. In fact, few United States public companies address board tenure directly in their bylaws. According to SpencerStuart, approximately 3 percent of company boards in the S&P 500 have specified term limits for directors. Only 17 companies in the S&P 500 set term limits for their directors in 2012, with no company adopting a term of less than 10 years. That same year, board turnover on the S&P 500 reached a 10-year low, reflecting the trend toward directors remaining in their positions.

Mandatory retirement ages are more common. SpencerStuart reports that 72 percent of companies in the S&P 500 have mandatory retirement ages, which reflects a 6 percent increase since 2003. Of those, the mandatory age exceeds 72 in 88 percent of corporate boards. Over the last 10 years, the percentage of boards with mandatory retirement ages of 75 or older has increased from 3 percent to 24 percent, while the percentage of boards with a mandatory retirement at age 70 decreased from 51 percent to 11 percent. Moreover, some U.S. public companies allow boards to waive the mandatory retirement age for directors, which is typically between age 72 and 75, according to David A. Katz and Laura A. McIntosh, authors of Renewed Focus on Corporate Director Tenure.

The lack of term limits and mandatory retirement ages promotes extended board service. Last year, 20 percent of U.S. corporate boards in the S&P 500 had an average director tenure of at least 11 years. The median age of directors was 63.

Director tenure limits are more prevalent outside the United States. The European Commission notes that an appropriate maximum tenure for a director is three terms, or 12 years. The United Kingdom employs the “complain or explain” model, which presumes that directors are no longer independent after nine years of service unless a company can explain why it has determined that a director remains independent after they reach the presumption threshold. France employs one of the most stringent guidelines for independent directors, capping director service at 12 years, though this does not give France the lowest average director tenure in Europe. That distinction goes to Germany, with an average director tenure of five years., Collectively, Europe has relatively shorter board tenures on average compared to the United States, which is 8.6 years. For reference, Spain has the highest average tenure in Europe at 7.7 years. In Asia, Hong Kong does not limit director service, but companies appointing an independent director to serve longer than nine years must employ a separate vote for the director using a special resolution.

Calls for Change

Recently, shareholder advocates have pushed director tenure to the forefront. Institutional Shareholder Services has been visible in highlighting potential issues with corporate director tenure, with its new Governance QuickScore 2.0 program. The product, which uses specific governance factors and technical specifications to rate company governance, takes director tenure into account. According to ISS, “[a] tenure of more than nine years is considered to potentially compromise a director’s independence.” ISS has not disclosed the weighting that each metric will actually have, so it is unknown how much impact long-tenured directors will have on a company’s QuickScore rating.

ISS has yet to alter its voting policy outside of QuickScore such that tenure can lead to a determination that a director is not independent. ISS does urge shareholders to vote against proposals to limit tenure by mandatory retirement ages or term limits, but it suggests shareholders scrutinize the average tenure of alldirectors if their tenure exceeds 15 years in order to promote independence and alternative perspectives.

State Street Global Advisors (SSGA) revised its view on board tenure in 2014 to reflect its support for board refreshment and planning for director succession. According to SSGA’s Head of Corporate Governance Rakhi Kumar, the new policy is “designed to identify companies with a preponderance of long-tenured directors, which may indicate a lack of refreshment of skills and perspectives . . . . [L]ong tenure may also diminish a director’s independence.” Though SSGA does not consider long-tenured directors to be entirely ineffective, SSGA discourages their presence on committees where “independence is considered paramount,” including the audit, compensation, and nominating/governance committees.

SSGA has indicated that it will screen companies based on whether their average board tenure is above one standard deviation from the average market tenure. If a company has a longer-than-average board tenure, SSGA will further screen it for (a) whether one-third of the non-executive directors have tenures in excess of two standard deviations from the average market tenure and (b) classified board structures. Following this screening, SSGA has indicated it may vote against the chair of the nominating committee, long-tenured directors serving on key committees, and/or (c) both the members of the nominating committee and long-tenured directors at companies with classified boards. SSGA, however, has not provided additional details on how it computes average board tenure.

The Council of Institutional Investors supports board turnover in order to guard against a “seasoned board member” losing his or her independence or thinking more like an insider over time. Further, CII’s policy highlights the high salaries that accompany director positions, and how the compensation fails to promote board refreshment. It is estimated that S&P 500 companies pay independent directors an average annual salary of $250,000. Despite an updated policy, however, CII refuses to deem its policy as endorsing a tenure limit, highlighting that removing long-tenured directors “could rob the board of critical expertise.”

Glass Lewis & Co. pushes back on the idea of an inflexible rule limiting director service. Glass Lewis believes such inflexible limits may not provide benefits or returns for shareholders. Its 2014 proxy policy thus reflects the idea that term and age limits are not in shareholders’ best interests, and that there is no evidence of a connection “between either length of tenure or age and director performance.” Nevertheless, Glass Lewis supports “periodic director rotation” through shareholder monitoring to promote fresh perspectives, new ideas, and business strategies. Glass Lewis notes that if a company does have an age or a term limit, shareholders should vote against the board waiving its self-imposed limit absent extenuating circumstances like a merger.

The Effects of Board Tenure Limits

There is no “one-size-fits-all” approach to board tenure. There are merits to imposing board tenure limits at some companies, specifically the potential to promote the independence of corporate directors by limited extensive service. Some directors may also become complacent or out of touch with the company or industry after extensive service. Replacing long-tenured directors may offer a new opportunity for the company to infuse fresh perspectives into the board, whether it may be in corporate strategy or industry expertise. In addition, boards can use mandatory retirement ages or term limits to avoid otherwise unpleasant conversations with directors whom the board believes should retire.

Despite the potential benefits of mandatory director refreshment, there is no strong indication that long-serving directors are not independent, which is the primary concern of those who criticize extended board service. A “one-size-fits-all” approach to term limits or mandatory board refreshment would restrict or remove experienced, knowledgeable board members arbitrarily and create situational difficulties for the company going forward. As noted above, long-tenured directors are often the most knowledgeable about the company and offer stability, particularly during changes in senior management. In addition, at some companies the most long-tenured directors often exercise considerable influence over less-tenured senior management. These factors balance heavily against any strict rule on board tenure. Additionally, term limits offer the potential to interfere with the development of effective collaboration among board members that have developed strong working relationships over the course of their tenures.

It remains to be seen if the increased attention on board tenure will have a significant impact on the corporate governance of U.S. public companies going forward, or if the international trends will be imitated in the United States. Mandatory term limits applicable to all U.S. companies are inappropriate. Rather, companies should continue to have the choice of whether to impose restrictions on board tenure. The important issue, therefore, is how companies make that choice.  We suggest a thoughtful consideration of board composition by nominating committees, boards and shareholders on a case-by-case basis that considers tenure, expertise in the particular industry, knowledge about a particular company, diversity, director competency, and the company’s success over the director’s tenure. Boards must also carefully assess their own composition in light of various experiences, backgrounds, skills, and traits that could enhance board performance. Boards themselves, along with input from their shareholders via annual director elections and shareholder engagement, are best equipped to assess whether to retain or remove their own directors, and should not be burdened by a uniform rule that may potentially yield unintended consequences to the detriment of the company and the shareholders.


Steven Haas is a partner in Hunton & Williams’ Richmond, VA, office. He represents clients on corporate governance and M&A matters. He also regularly counsels clients with respect to corporate governance issues and fiduciary duty litigation.

Diversity in the Boardroom: The Importance of Change

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For years, boards have discussed diversity but little action has been taken. Demographic shifts and the continuing focus on global competitiveness point to change on the horizon.  While it won’t happen tomorrow, all signs point to increasing diversity within the next few decades — when the current millennials are in their 50s, the boardroom will be much more racially diverse.

I recently addressed two highly engaged groups in Washington, D.C., and the attendees reflected very similar attributes and a common aspiration — a desire to gain their first board seat. My advice for gaining that first board seat was clear. It’s all about who — and what — you know.

The first group I met with was from Ascend, and the second group was from Women in the Boardroom. While the composition and mission of the latter is evident, the former may be new to you. Ascend is an association consisting of nearly 50,000 Pan-Asian leaders who are passionate about ascending the highest ranks of business. I spoke during Ascend’s recent global conference of more than 2,500 people.

NACD believes diversity is a global business imperative. I mentioned during my talks that NACD has been a champion of diversity in the boardroom for more than 37 years, dedicating content, events and actions to the issue. Further, we don’t define boardroom diversity as being simply about color or gender. It’s about diversity of thought, perspectives and experience – from a cognitive perspective.  Ideally, the skills, experiences and perspectives of a company’s directors should reflect those required to proactively oversee the company’s strategy.

For more information about NACD’s positon on diversity in the boardroom, please read our Blue Ribbon Commission Report here.

Through the Boardroom Lens

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Directors attending the recent NACD Directorship 2020® event in Denver, Colorado engaged in group discussions about how boards can anticipate and effectively respond to environmental and competitive disruptors in the marketplace.

The half-day symposium at the Ritz-Carlton on July 15 was the second of three NACD Directorship 2020 events this year addressing seven disruptive forces and their implications for the boardroom. Summaries of the Denver speakers’ main points are available here.

Following each speaker, directors developed key takeaways for boards. Those takeaways fell within the parameters of the five elements of effective board leadership defined at last year’s NACD Directorship 2020 forums: strategic board leadership and processes, boardroom dynamics and culture, information and awareness, board composition, and goals and metrics.

Environmental Disruptor Takeaways

Strategic Board Leadership and Processes

  • Crisis response plan. Ensure that the company has a contingency plan in place that takes into account a potential environmental crisis. The plan should include how the company will respond to disruptions in the supply chain and production cycle, as well as to employees, customers, and investors.

Boardroom Dynamics and Culture

  • Culture. Boardroom culture should reflect that directors are ready and willing to be held accountable for environmental or climatological issues that arise for the company.

Information and Awareness

  • Engagement. The company should have an established communications plan to use in response to requests from shareholders and stakeholders regarding environmental matters.

Goals and Metrics

  • Green metrics. Becoming a sustainability-focused company requires adopting a long-term commitment to the cause. The board can communicate that commitment by establishing environment-related performance metrics that align with the corporate strategy.

Competitive Disruptor Takeaways

Strategic Board Leadership and Processes

  • Board agenda. Set aside time on the board agenda to discuss forward-looking strategy, so that the board’s focus is not limited to reviewing the company’s past performance.

Boardroom Dynamics and Culture

  • Culture. Fostering innovation requires risk. The culture throughout the organization should support failure and risk taking within the company’s tolerances. Also invite outside experts—or “white space” teams—to help trigger new, innovative thoughts.

Board Composition

  • Composition. Board composition should reflect a diversity of thought and experience. Regardless of background, directors should be willing to ask probing questions and stay aware of marketplace trends.

Goals and metrics

  • Understanding the marketplace. Management should be able to answer who future competitors might be and what trends might gain traction.