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While we’re on the topic of board refreshment, a recent paper says that refreshing your board can pay some significant governance dividends. Here’s an excerpt from a CLS Blue Sky Blog post by the paper’s authors:

Our results suggest that board refreshment is associated with stronger CEO turnover-performance sensitivity. In simpler terms, refreshed boards are more likely to replace the CEO after weak performance.

We also find that refreshment is associated with stronger pay-for-performance sensitivity. CEO wealth becomes more closely tied to stock price performance, and the difference is not trivial: It corresponds to tens of thousands of dollars in additional pay sensitivity for a board that has refreshed more than a typical peer. At the same time, refreshment is positively related to pay-for-risk sensitivity. This balance matters. Compensation should reward performance, but it should also give managers incentives to take appropriate risks rather than avoid valuable long-term projects.

Taken together, the results suggest that refreshed boards do not just look different. They appear to monitor differently. They are associated with stronger CEO dismissal discipline after poor performance and with stronger CEO pay structures that better connect performance and risk.

The authors also suggest that companies that take an active approach to refreshment may be missing an opportunity when it comes to their proxy disclosures, because most disclosures don’t address how the company’s board has evolved.

They argue that these companies should explain in their proxy disclosures the “capabilities, expertise, or perspectives recent appointments added relative to the previous board, and how those changes respond to the firm’s current governance and oversight needs.” The authors believe that disclosure like this would enable investors to distinguish between ordinary director turnover and genuine board renewal.

– John Jenkins