According to PwC’s 2018 Annual Corporate Directors Survey, a surprising 45% of directors believe a fellow director should be replaced, with over 20% of directors saying two or more of their fellows should no longer be on the board at all. So why don’t companies impose term limits as a simple way to ensure boards are refreshed periodically?
A lot of the issue is rooted in historical traditions. Instead of term limits, over three quarters of boards in the S&P 500 have set a mandatory retirement age for their directors. Within this sector, 73% of directors say that this is an effective way to refresh their boards.
However, as the amount of investor oversight and shareholder activism is increasing, boards must be more proactive to ensure that they have the right mix of skills and experience to ensure the successful growth of their company. Ken Bertsch, Executive Director of the Council of Institutional Investors, states that “investors sense that boards haven’t been very effective in moving underperforming directors off their boards. There’s too much complacency, too much lengthy tenure.”
While board limits are presented as one of the most obvious ways to encourage board turnover, only 5% of S&P 500 companies have introduced any term limits. Those that have are shown to have established limits on an average of 15 years or higher. This might stem from the fact that 52% of directors believe that making their boards more diverse is solely a box-ticking exercise, not something of actual importance. With this mindset, the benefit of new perspectives and skills being introduced to a board through regular turnover is easily lost.
There are numerous boards taking strides to put term limits into effect, such as global leaders like GE, Disney, P&G, Target, Mastercard, Amazon, and Walmart. Adoption of these limits might be slow in the U.S, but at least twenty-five other nations globally have introduced a maximum term limit into law. On average in countries like the U.K, Denmark, and France, a board member’s tenure is anywhere from 8-10 years.
Does tenure have any impact on board effectiveness?
There are both pros and cons to introducing term limits- but will it make any positive difference in the long run?
Those in favor of term limits argue that this is the most effective way to refresh boards, ensuring the proper mix of skills are present to run the company smoothly. Especially in an era where having current digital skills is vital, those in favor of term limits believe that refreshing boards regularly will ensure competitive corporate governance. Those against term limits argue that limits can adversely affect boards because they unnecessarily oust members who are adding positive value.
It is important to understand whether or not the length of time an individual sits on a board affects their ability to contribute productively. A recent study conducted by Harvard University found that “tenure if not a decisive factor in board performance”. The study further concluded that no long term value is created solely from board members remaining on a board for longer periods of time. Considering this, boards will need to reexamine what each board member contributes and ensure that they are not just filling seats.
If boards do not have term limits, how else can they refresh and stay relevant?
Are term limits the way forward?
There are positives and negatives attached to the term limits discussion, but the goals of each individual company can dictate whether or not they implement term limits. For smaller companies, board members may have an “owner” mindset and therefore have beneficial longer term limits. Large companies, on the other hand, may benefit more from more regular turnover to ensure that members truly stay independent and detached from the politics within the organization.
If you’re interested in having a gap analysis performed for your board, In Touch can help. Please contact us at hello@intouchnetworks.com to find out more.
