Board Tenure: To Limit or Not to Limit?

Statistically, executives tend to linger once they begin serving on a board. In fact, the Wall Street Journal reports, “At 24% of the biggest U.S. companies (S&P 500), a majority of the board has been in place for at least 10 years…It is a marked changed from 2005, when long-term directors made up a board majority at 11% of large companies.”
Board Tenure: To Limit or Not to Limit?

Moreover, some of those long-tenured directors have been serving on boards for upwards of 40 or 50 years.

The conversation about board tenure is a somewhat new one. For decades, seasoned board members have been considered a major asset to corporations—especially at companies where growth has been consistent.

As activist shareholders put more pressure on boards and the call for board diversity (of all kinds) grows, though, companies are beginning to consider the potential benefits of board term limits. In 2012, board turnover hit a 10-year low—forcing companies to face the dilemma of simultaneously seeking diversity while also having very few board positions to fill.

At the present moment, no national or state laws exist to cap board tenure. Companies are expected to craft those policies on their own. Although board tenure is a hot topic, relatively few companies currently have limits in place. For example, a mere 17 of the S&P 500 companies employ term limits. On the other hand, the majority of these companies have set mandatory retirement ages—72% to be exact. Of that 72%, most set the maximum at around 75 years, though many of those policies can be overridden with board approval.

Why set retirement limits but not term limits? It appears that Fortune 500 companies still value experience and familiarity a great deal. When they secure a formidable and experienced board member, they’re eager to retain them.

Critics of this strategy argue a couple major points. For one, they say that when a board member serves upwards of a decade, they become less of an “independent” director; their prolonged board service makes them more of an “insider” over time. Second, critics argue that without regular board turnover, the ideas and strategies in the boardroom will grow stale, which is detrimental to shareholder prospects.

Retirement limits, on the other hand, are seen more as a safety valve option and can be circumnavigated if necessary.

At the end of the day, setting board limits should refer to the needs of individual companies. For the ones in fast-paced, tech sectors, term limits might make sense in order to keep strategies fresh and innovative. For companies with an aged board, retirement limits might be more effective for creating diversity.

As shareholders and government entities continue to expect more out of board oversight, you can bet that conversations like this one will flourish.

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