Report suggests term limits could enhance both diversity and independence of corporate boards.
A report on board diversity released this week by GMI Ratings shows that women’s lack of progress in gaining more seats on corporate boards over the last 12 years may be linked to the high percentage of men serving at least 10 years as directors.
Long director tenures make it harder to expedite board diversity at public companies, since relatively few board seats turn over each year, according to the report, titled ‘Director tenure and gender diversity in the United States: A scenario analysis.’
Long tenure in and of itself is a concern for many investors who suspect it impairs independence.
More than 25 percent of board seats in the US are held by men with at least 10 years’ tenure, according to the report, which analyzes the potential impact of replacing various percentages of these long-tenured men with women. If less than half (46 percent) of the male directors in the Standard & Poor‘s 500 Index with over 10 years’ seniority were replaced by female directors, women would hold 30 percent of that index’s board seats. In the Russell 1000 and 3000 indices, 54 percent and 62 percent, respectively, of the men with over 10 years’ tenure would need to be replaced by women for women directors to reach the 30 percent threshold. These findings will no doubt be compelling to investors pushing for greater board diversity as well as higher independence standards, the report states.
Gender diversity in US boardrooms has slowed dramatically since 2001, as GMI Ratings’ 2013 Women on Boards report documents. In the last 12 years, the proportion of S&P 1500 board seats held by women has increased by less than five percentage points. Many investors have been trying to accelerate the pace of change in boardroom representation, taking a cue from research that has shown that board diversity can lead to improved oversight, decision-making and corporate performance.
Long tenure is increasingly a concern of more investors due to fear that the relationships that directors form with management over time may erode their objectivity. Under the UK’s Corporate Governance Code, service of over nine years is presumed to compromise independence, forcing companies to justify their determination that such long-tenured directors remain independent. Term limits for directors might benefit companies both by enhancing board independence and by making it easier to further diversify boards.
To understand better how term limits could affect female representation on US boards, GMI Ratings began by calculating the percentage of US directorships currently held by men serving 10-plus years. Then it figured what percentages of these directors would have to be replaced by women in order to reach different thresholds of women’s participation.
Currently women make up 17.5 percent of the directorships of the S&P 500, 15.1 percent of the board seats of the Russell 1000 and 12.1 percent of those of the Russell 3000. By contrast, none of the aforementioned indexes has less than 26.9 percent of its US board seats being held by men with over 10 years’ tenure, however, women with as much tenure now account for only 4.8 percent, 3.9 percent and 2.9 percent of the seats of the S&P 500, Russell 1000 and Russell 3000, respectively.
To see the full report, click here.
