Long-serving boards and board renewal policies may face increasing scrutiny in the 2015 proxy season. Canada’s Institute of Corporate Directors (ICD) recently released a position paper, Beyond Term Limits: Using Performance Management to Guide Board Renewal (the ICD Paper) which calls on boards of directors to rethink their board renewal policies and encourages a more proactive and flexible approach to renewal, focusing on director performance and cautioning against over-reliance on term limits.
The ICD Paper questions the effectiveness of term limits to ensure adequate board renewal, and instead encourages boards to center their renewal policy around comprehensive board evaluations. For many boards, annual evaluations may be a routine check-the-box exercise. The ICD argues that rigorous and regular evaluations of board composition and director performance can help identify opportunities for change and improvement on the board. The ICD’s view is that a fulsome evaluation of each director’s performance in connection with the corporation’s strategy will shine a light on under-performing directors, help create accountability and improve overall board performance.
It may be challenging for some boards with long-serving directors to engage in what can be a difficult dialogue around director under-performance and potential stagnation on the board. The ICD Paper suggests using various forms of evaluation, including full board, self and peer evaluations to identify potential issues. A board may also choose an evaluation method to best suit its needs and personalities, including written questionnaires, surveys, interviews, full board discussion or often, a combination. Evaluations, argues the ICD Paper, should focus on how a director’s skill-set, experience and behavioral competencies contribute to the overall performance of the board.
According to the ICD Paper, this issue is timely for Canadian boards, with the average age of non-executive directors in Canada having risen to 63 in 2014, as compared with 60 in 2009, and the average director tenure having risen from eight years in 2009 to nine in 2014.
With this trend and enhanced disclosure rules in mind, shareholders may increasingly focus on board renewal and director performance in the upcoming proxy season. It is prudent for boards to be proactive and transparent in improving their renewal policies and ensuring an effective evaluation system is in place, giving investors confidence that the board’s composition, skill-set and performance are in line with the corporation’s long-term strategy.