Knowledge Center: Publication
Chief Executive Officer & Board of Directors
Time’s up: Director tenure moves to the front burner8/14/2014 Matt Aiello and Lee Hanson
Over the past 10 years directors have devoted an enormous amount of time and attention to a long list of pressing concerns, from compliance to risk oversight, succession planning, and more. Now, another long-simmering issue has become one of the latest flash points in board governance: director tenure. Insistent questions about length of director service have been pushed to the fore by four trends that have converged to give the issue new momentum.
First, the bar for independence on the part of directors has been raised considerably. Formerly, an independent director was simply a board member from outside the company. Subsequently, independence also meant that the external director had been appointed by the board, not the CEO. Today, the argument goes, someone who has been on the board for 15 years, working with the same CEO, can become too cozy with management and, for all intents and purposes, can cease to be genuinely independent.
Second, boards, institutional investors , and advocates for good governance increasingly frame director tenure as a question of board “refreshment.” They recognize that as a company and its strategy change over time, a reliable mechanism must be found for bringing new ideas and fresh perspectives to the board — an understanding of markets, geographies, business models or functions that have become newly critical for success.
Third, facing the dizzying emergence of new technologies, many boards want and need to tap into the pool of candidates who are on the cutting edge of these revolutions — many of whom are relatively younger than the average director. Just a few years ago, for example, cybersecurity, digital marketing, and big data hardly registered on board radar screens. The convergence of social, mobile, cloud, and information technologies now offers additional complexities. Older board members, especially those who are no longer active executives, may have less feel for these transformational and potentially perilous waves now washing over every industry. Tenure-limiting mechanisms are seen as a means to make way for candidates who are completely at home in this new world.
Fourth, limiting tenure, either by age or term, has also been strongly advocated as a way to make room on boards for traditionally underrepresented pools of talent, such as women and people of color. By increasing board turnover, tenure-limiting mechanisms increase the opportunities to create more diverse boards. On the evidence of the Heidrick & Struggles Board Monitor, established in 2009 to capture key characteristics of newly elected independent directors of Fortune 500 companies, turnover among board members has remained stable — and low — throughout the past five years. From 2009 through 2013, the number of newly appointed directors of Fortune 500 companies averaged 326 per year, with a turnover rate that ranged from 5.4% to 6.8%. With SEC regulations now calling for more transparency about diversity and the selection of directors, and with quotas gaining ground in the European Union, the push for mechanisms that enable more diverse boards continues to drive much of the conversation around tenure.