July 30, 2013

Board Tenure: The New Hot Governance Topic?

At a recent event, a member joked with me that his CEO was asked: “What was the average age of directors on his board?” – and the CEO answered: “Dead.” Based on recent stats, it appears that many directors are comfortable as turnover is quite low these days. This is reflected in Jim Kristie’s Directors & Boards piece entitled “Troubling Trend: Low Board Turnover.” As Jim points out, a director with a certain background might make sense for the company now – but might not ten years down the road as the circumstances change.

Perhaps even more important is the independence issue – is a director who sits on the board for several decades likely to still be independent after such a long tenure (see this WSJ article about the 40-year club)? Does it matter if management turns over during the director’s tenure? And if so, how much? These are issues that are being debated. What is your take?

As blogged by Davis Polk’s Ning Chiu, CII is considering policy changes linking director tenure with director independence, under which it would ask boards to consider a director’s years of service in determining director independence. According to the proposed policy, 26% of all Russell 3,000 directors have served more than 10 years and 14% have served more than 15 years. CII would not advocate for any specific tenure, unlike the European Commission, which advises that non-executive directors serve no more than 12 years. Note that under the UK’s “comply or explain” framework, companies need to disclose why a director continues to serve after being on the board nine years. I have heard that seven years is the bar in Russia.

How Does Low Board Turnover Impact Board Diversity?

Related to proper board composition is the issue of whether low board turnover is just one more factor that stifles board diversity. As well documented in numerous studies (see our “Board Diversity” Practice Area), gender diversity on boards has essentially flat-lined over the past decade – and actually has regressed in some areas. This is a real-world problem as it’s been proven that differing views on a board lead to greater corporate performance. To get boards back on track, I do think bold ideas need to be implemented – and plenty are out there, such as this one. I can’t believe that more investors haven’t been clamoring for greater diversity – but I do believe that day is near…

Meanwhile, check out the nifty artwork from the cover of this issue of Directors & Boards:

board diversity.jpg

Should Directors Talk to the Press?

Written from the perspective of a journalist, this article clamors for more directors to talk to the press. The author believes that directors are reticent to open up because of fear of being misquoted or uninformed. Apparently, the author is not aware of Regulation FD, which was adopted in 2000 – three years after his example of when a director was helpful to him in reporting a story. [Of course, Reg FD doesn’t apply to communications to the news media, but FD does cast a big shadow.]

– Broc Romanek