The scrutiny of pale, stale and male boards continues, this time focused on the “stale,” that is, long-tenured directors. According to the WSJ, institutional investors are increasingly questioning whether more turnover on boards might be appropriate.
According to a WSJ analysis, in 2005, at 11% of large companies, a majority of directors had served on those boards for at least 10 years. Compare that to last year, where the analysis showed that board majorities at 24% of large companies had served for a decade or more. That analysis also revealed that 20% of all directors are “at least 70 years old, nearly double the rate a decade ago,” with only two boards having a median age below 50. Similarly, one-third of directors serving on S&P 500 boards in 2005 still held those seats last year, and one out of six directors had held his seat for at least 15 years. In part, the WSJ attributes these increases, tautologically perhaps, to “low turnover”: according to recruiting firm Spencer Stuart, “just 7% of board seats turn over each year at large companies.” Notably, the WSJ observes that “efforts to bring more women and minorities onto boards are hindered by low turnover.”
In addition to providing experience and historical memory, long-term directors are also, potentially at least, the ones with sufficient gravitas to challenge management. However, some institutional investors are sounding alarms over the possibility that long-tenured directors may not contribute the fresh perspectives that newer directors can bring and, more significantly, that their independence from management may be compromised — not in the technical sense of course, but rather more in the sense of “social independence.” (See this PubCo post for a discussion of the long-term director as the “new insider.”)
According to the head of a corporate governance center at the Conference Board, “’[t]he tenure issue is one that is bubbling below the surface.’“ The WSJ observes that BlackRock and other big money managers have begun to oppose the re-election of some long-term directors. According to the article, State Street Global Advisors has indicated that “tenure concerns” caused it to vote against 339 directors last year and 355 the prior year before. The California Public Employees’ Retirement System (affectionately known as CalPERS), in its revised Global Governance Principles, indicated “that it believes ‘director independence is compromised at 12 years’ and that companies should vigorously evaluate the director and either classify them as non-independent or explain their decision otherwise.” (See this PubCo post.)
Notably, big companies have not been moving toward adoption of mandatory director retirement policies (whether determined by age or tenure). The WSJ reports that, among the S&P 500, “only 13 had limits on director tenure last year, down from two dozen in 2010, according to Spencer Stuart—while two thirds explicitly disavowed tenure limits. And boards with mandatory retirement ages have been nudging them higher as directors age; today a third have set them at 75 or older, compared with just 8% in 2005, Spencer Stuart found.” Interestingly, however, a forthcoming survey from accounting and consulting firm EisnerAmper LLP shows that the overwhelming majority of directors favor age and term limits, just not for themselves. The firm surveyed directors at more than 300 companies (public, private and not-for-profit). As reported in this article in the WSJ, while 75% of those surveyed said that they supported age and tenure restrictions, 61% said that they were not subject to term limits and 76% said they were not subject to age limits. (See this PubCo post.) One issue that may be impeding adoption is that term limits are not well-defined and may seem arbitrary. The range for tenure limits identified by the WSJ can run from 12 to 20 years.
Internationally, retirement policies and related regulations are more prevalent. The WSJ reports that, in Hong Kong, companies must separately vote to re-elect directors after nine years of service. In France, directors lose their independent status after 12 years, while in the U.K., the WSJ reports, an independence review is mandatory after nine years of service. However, no similar review is required in the U.S., where there are a significant number of companies with long-term directors. However, according to the WSJ, reporting on a study from last year, “[a]pplying similar rules to large U.S. companies would have profound effects: Thirty percent of U.S. companies would no longer have an independent majority of directors if board members were considered insiders at a decade.”
Will tenure limitations become the next cause célèbre? Acknowledging that “‘[h]aving some long-term board members is not bad in and of itself,’” NYC Comptroller Scott Stringer nevertheless expressed concern that “’too many [long-term directors] raises red flags about the board’s independence and succession planning.’”
SideBar: That name ring a bell? Stringer oversees the NYC public pension funds and, more to the point, kicked off the wave of proxy access shareholder proposals by submitting proposals to 75 companies last year and another 72 this year, all as part of the “Boardroom Accountability Project.” (See this PubCo post.) It wouldn’t take a big leap to imagine that comment transmuted into an avalanche of shareholder proposals related to board tenure.
Although, at this point, the key proxy advisory firms typically do not support shareholder proposals for mandatory retirement age or term limits, ISS has indicated that it will “scrutinize boards where the average tenure of all directors exceeds 15 years for independence from management and for sufficient turnover to ensure that new perspectives are being added to the board.” Similarly, Glass Lewis favors “periodic board refreshment to foster the sharing of new perspectives in the boardroom and the generation of new ideas and business strategies.”