Whether a board at a public or private company, if it’s knowledge base is not constantly evolving in terms of contemporary business and economics then eventually expect the type of disruption recently seen at several major companies. Boards periodically need new people to bring new ideas to constantly question assumptions and practices.
An independent director according to the TSX, cannot be a member of management and should be free from business relationships that could materially interfere with their acting in the best interests of the company. This definition however, does not address how these attributes can erode over time and how boards must recognise the necessity to periodically refresh their competency.
For example as directors become more experienced they accept more board seats diminishing the time that they can reasonably devote to each, and through lengthy tenure, they become closer to and more empathetic to management.
The thoughtful periodic refreshment of skills if nothing else, maintains alignment with company strategy and growth. Growth brings more complexity requiring different insights.
The Conference Board estimates that one-third of all board members have served 12 years or longer, and 16% have at least 16 years. Governance advocates call for age and term limits similar to Europe, where after ten years directors are no longer viewed as independent. Age limits are not popular in the US where it is not uncommon fo a company to raise the age as a director approaches.
But are rigid limits the best method of ensuring board refreshment; they force the arbitrary retirement of possibly valuable directors and encourage underperformers to serve out fixed terms. More concerning is that they can also provide an easy way out for boards not to manage strategic succession. No board chair wants a challenging conversation with a great contributor, whose skill set is no longer relevant.
Boards cannot wait for event triggers like age or tenure to refresh their currency at a fast moving corporation. Particularly in a private company where the Board’s primary purpose is to advise based on current knowledge. A good board refreshment process will trigger candid conversation about effectiveness, and be a catalyst for identifying the need for contemporary business experience, less common in aging directors.
A 2011 S&P study found that boards with long-serving directors were more likely to be associated with governance problems while on the other hand researchers in 2012 found that directors with extended tenure exhibited superior governance. Explaining perhaps why boards are getting older! The average age in the US rose to 63 in 2021.
ISS policy does not suggest that tenure should not be presumed to indicate anything problematic or considered a key factor in determining director voting recommendations. However, proxy advisors generally do look at the average age of boards.
Australia, the EU and the UK all require an explanation of why the independence of directors with extended tenure has not been compromised with some adopting maximum tenure recommendation e.g. three terms.
Best practice is likely a combination of all of these measures and will depend on the speed of growth or rate of change the organization is going through. Age and tenure are not necessarily an indicator that change is required but recognize that limits are no substitute for a robust skills review to ensure the board is truly independent and does not comprise redundant skills.