Director Tenure and Board Commitment Draws Mixed Views

By Vijayam Nadarajah

There is no perfect solution when it comes to refreshing boards although limits, commitment and succession planning will likely continue to gain traction to optimise director and board performance. 

BOARDS SHOULD PROVE THEY IDENTIFY AND REPLACE UNCOMMITTED DIRECTORS, INSUFFICIENTLY INDEPENDANT MEMBERS OR THOSE WITH COMPETENCIES THAT ARE DISPENSABLE IN A CHANGING BUSINESS ENVIRONMENT

Boards that do not comply with rules on director's tenure and age limits should explain that by retaining long-serving and effective directors, they can create high performing boards in the long run with the right mix of competencies.

They should also disclose strong succession plans and objective with third-party director together with board evaluations. This process, when applied consistently, will negate the elimination of outstanding performers and disallow manifestly underperforming directors to linger for years.

Boards should prove they identify and replace uncommitted directors, insufficiently independent members or those with competencies that are dispensable in a changing business environment.

BlackRock Institutional Trust Company, North America, will vote against the longest-tenured director if there is a lack of responsiveness to shareholders on board composition, insufficient attention to board diversity, or there is a failure to promote adequate board succession planning over time in line with the company’s strategic direction.

The voting decision will also depend on company type, industry and the business cycle. BlackRock believes that with a variety of tenures within the boardroom, board quality and continuity of experience can be promoted.

Term and age limits should not be enforced at the expense of the arbitrary retirement of valuable directors. The case for strengthening expertise and providing fresh perspectives in the boardroom by periodically replacing directors can only be justified if nomination committees have access to a ready pool of professional directors including women to populate boards.

Nomination committee chairs have to explain to outgoing directors as to why board renewal is necessary for the greater good of companies. They can highlight the need to comply with rules on age and term limits and appoint more tech-savvy candidates in line with the convergence of social, mobile, cloud and information technologies.

Chairs could use diplomatic and humane ways to address directors on compulsory changes in board directorships.

CHAIRS COULD USE DIPLOMATIC AND HUMANE WAYS TO ADDRESS DIRECTORS ON COMPULSORY CHANGES IN BOARD DIRECTORSHIPS.

The push for mechanisms that enable more diverse and independent boards continues to drive much of the conversation around tenure, board mix with a fit and proper director appointment.

Fresh board and director assessments are highly recommended when business directions, operating models, culture, board dynamics, processes and tone on top are impacted by the entrance of strong and influential shareholders and the departure of dominant directors.

Corporate exercises could result in the premature departure of performing directors or frequent changes by re-designation and subsequent removal of directors.

According to the institutional investor policies on director’s tenure JPMorgan Asset Management, it will vote against shareholder proposals to limit the tenure of directors if limits pose artificial and arbitrary impositions on the board and harm shareholders’ interest by forcing experienced and knowledgeable directors off the board.

To consider a long-serving director for re-election, the asset manager will score company’s performance during the director’s tenure.

In the Spencer Stuart US Board Index 2015, we observed an overall increase in the average age of directors on boards and retirement age from companies. Boards have revised age limits to retain senior members whom they consider too valuable to replace, and the process allows for the appointment and retention of more senior directors generally.

General Electric uses a combination of term limits, retirement ages and annual board evaluations for board refreshment. Whilst companies are turning to more robust director evaluation and nomination processes, the outcomes on-board refreshment remains to be seen.

On the local front, through the Malaysian Code of Corporate Governance 2017, a tenure limit of nine years has been set for independent directors of public listed companies. Should there be a need for extension, shareholders’ annual approval is required.

Boards should re-examine the effectiveness of existing governance policies and practices on director’s tenure and board commitment by finding alternative means to realistically promote and engage dynamic and productive boards. The policy changes should not damage the working dynamics and board collegiality of retiring directors even on the basis of a formal evaluation.

With the support of the lead or senior independent directors and board chairs, difficult conversations on board refreshment and setting expectations right for new appointees can be more structured and fruitful.