How long is too long?

When shareholders tote up a list of attributes they most appreciate in corporate directors, longevity isn’t near the top of the page. But engineering the churn of fresh blood in a boardroom that is often, by tradition or definition, an insular environment has proven vexing. Enshrined term limits or age ceilings for directors can be overly blunt instruments. Relying on good grace and common sense can sometimes turn into an excuse for genteel inaction. 

The best boards benefit from oxygen and sunlight. After all, directors who have served for decades may lack modern skills and insight, lose their objectivity or independence, or just grow bored with the process. The reasoning goes that they sit in the chairs that could be better filled by someone a little younger, perhaps with more varied experience or fresher viewpoints. 

But it’s not so obvious

One shareholder’s geezer is another’s soul of institutional memory, the cherished link to a founding family, or even the marquee name that lends cachet to the boardroom. Losing that director, the reasoning goes, could alienate traditional constituencies or sacrifice priceless company-specific knowledge. And then there are the superstars. 

‘Could you imagine firing Warren Buffet if you were lucky enough to have him?’ says Bruce Goldfarb, senior managing partner and general counsel at Georgeson Shareholder Communications. Of course not. In an age of escalating governance demands, some companies are wrestling with the notion that cherished lions or senescent mandarins will have to go. And the directors themselves may be forgiven for not noticing that the position is no longer a lifetime appointment with a generous stipend. 

Although Sarbanes-Oxley makes no mention of term limits, it so dramatically ratchets up expectations and demands that there is little wiggle room for directors who do not heartily contribute, especially in key areas such as auditing and compensation. 

Only a handful of boards have set time limits on their independent directors, and fewer than one third have set age ceilings, according to the Washington-based Investor Responsibility Research Center (IRRC). 

These arbitrary limits have the virtue of being definable, enforceable and generally fair, say observers, but they are also an attempt to graft a universal solution onto a problem that is nuanced and highly variable. Far better, say corporate governance experts, to put in place an evaluation process where directors are held individually accountable for their actions and decisions. The board should craft its own criteria based on unique issues and needs. Once it has established the policy, experts say, it’s up to the board itself, or even shareholders, to decide who stays – and who has stayed too long. 

So how long is too long?

While age ceilings have formed a large part of the tenure debate they are not the only important factor. Seasoned executives and technocrats are often not available for board service until relatively late in life. And many relatively young directors who have long service on their boards would not be affected by age limits anyway. 

The Higgs review, which formed a significant basis for the UK’s Combined Code, suggests that after nine years the independence of a director should be brought into question because that director may have become too close to management to make truly impartial decisions. But arbitrary solutions often fail to correct some problems even as they create others. 

‘We’ve all seen directors get better as they get older,’ says Roger Raber, president of the National Association of Corporate Directors (NACD). ‘I understand why companies have term limits, but they are flawed if you depend on them exclusively. If you’ve got to leave after nine years or after age 72, it can be pretty arbitrary. It is one way to provide some limits and prevent people staying on for 30 years. But what you really need is accountability.’ 

Age limits, in particular, are uniquely vexing for corporate boards. It takes a long time to acquire the real-world experience, professional chops, corporate title and business connections needed to become a world-class director. The leading ranks of independent directors are drawn from former senior executives, retired accounting partners and other business leaders with decades of experience. 

‘Clearly, ability and enthusiasm should be the criteria, not just age,’ Goldfarb adds. ‘Kirk Kerkorian, Warren Buffet, Vernon Jordan – most companies would be thrilled to have people with that kind of business acumen on their boards.’

Surveys of shareholders, directors and legal advisers show little appetite for age or term limits per se, although there is broad agreement, from pension giant TIAA-Cref all the way to gadfly Evelyn Davis, that companies should put some sort of formal retirement policy into place. Such a policy, according to TIAA-Cref’s web site, ‘will contribute to board vitality.’

Raising the bar

‘A lot of boards have been refreshed quite a bit over the last two years, driven in part by Sarbanes-Oxley,’ notes Charles King, who heads up Korn/Ferry’s global board services practice and is opposed to arbitrary term limits. He says boards are far more prone than in the past to policing themselves and gently asking stale directors not to stand for reelection. Formal limits, he suggests, ‘have philosophical and practical problems’ such as the assumption that after ten years a director will grow too supportive of management. 

‘Corporate governance bars have been raised and companies are much better governed today than four years ago,’ King points out. ‘I haven’t heard one of those ‘napping directors’ stories in a while.’ 

Once a company does adopt criteria for evaluating its directors, it’s up to the board – or sometimes the shareholders – to determine whether a director needs to be replaced. Institutional investors and pension funds are increasingly demanding a voice in choosing directors, either through staggered elections or direct elections. But the voice of the shareholder is rarely unified, and ‘just vote no’ campaigns that toss out directors often fail to find majority support for the candidate to replace him or her. 

‘It requires far more votes to replace a director than to oust one,’ explains Goldfarb, who has observed a number of efforts on behalf of dissident shareholder groups. A plurality could be a single vote, while a majority of shares outstanding voted in favor of a single slate or candidate could be a very difficult groundswell to achieve. Without it, the process usually reverts to the board itself and its nominating committee. 

A changing environment

Of course, it’s not just age or insularity that can mark a once-competent director for extinction. Consider how the business environment has changed over the last decade, as more attention has been paid to ethics, compliance, disclosure, transparency and other 21st century buzzwords of good governance. For some old-school directors, this increased scrutiny may not be welcome. 

There has been a revolution in business itself, not to mention whole industries and sectors that scarcely existed a decade ago. Even the most traditional of businesses has traded in the typewriter for a computer system, and the valuable director will have some ideas about the importance of staying abreast of human or technical innovation. 

In other instances it’s the landscape of the individual corporation that’s changed. Boards have been seeing a lot of no-fault resignations, observers say, when the board and an individual director agree that he or she has served well but lacks the skills or stamina to continue in the present environment. For example, an independent director with significant experience in bankruptcies or turnarounds may not be so vital once the company is back on its feet. 

Experts note that, at least in theory, directors have always been accountable to shareholders and the law, but that notion only acquired some traction in the last 20 years. Sox, of course, enshrined accountability into law and boards have been quietly shedding their dead wood ever since. 

So quietly, in fact, that the reason for a departure is rarely announced. Corporate secretaries are urged to make sure their boards are in compliance with whatever corporate bylaws are in place regarding age or term limits, and then to begin the far more delicate job of assessing individual members. 

The NACD in April updated its Blue Ribbon panel on board evaluations. Although the group has no specific recommendations on limits, the message of the 80-page document is crystal clear and unshakably consistent: directors must be accountable, capable and in tune with the overall issues and missions of the companies they serve. The document also stresses that, given directors’ responsibilities amid escalating scrutiny – approving corporate mission and vision; choosing, monitoring and compensating the CEO; overseeing the development and implementation of a company’s strategic plan; and ensuring legal and ethical compliance – directors must craft strategies to make sure they themselves are up to the job. 

‘To evaluate itself, a board should compose a description of its specific duties, goals and objectives, and then set about measuring its performance against those responsibilities,’ according to the panel, which also suggests that boards designate the nominating or governance committees to monitor board composition and operations. To get the ball rolling, they suggest, the board should begin with private conversations, a survey of members, a special meeting or other techniques to assess the state of the board and its needs.

‘Even if a board has no experience with evaluation, there is a way forward and a right first step – whether formal or informal – to get the process started,’ the panel writes. ‘An evaluation process offers the framework for continually assessing the board’s collective and individual contributions in relation to the corporate strategy. Without such a process, a board may not have the right people and culture addressing the right issues and information.