There was a time when a directorship was akin to a life peerage, where tenure was perpetual until the director became physically incapable of attending meetings.
Today, the issue of board tenure is much more complex and framed by the director’s usefulness or appropriate contribution to the organisation. How this departure point is canvassed and ultimately agreed upon is not always obvious or effortless.
• There is no direct correlation between board terms and board performance.
• There is a recent trend by organisations to limit directorship to three year terms.
• Board Performance evaluations are beginning to incorporate a consideration of director tenure, in addition to composition.
• Organisations typically use three approaches to tenure:
“I would hate to see mandatory tenures for directors. It is the contribution that needs to be counted and not the age or length of tenure”
– Chairman, ASX/50
For a director, the decision to call it a day is a critical component of the board composition debate and speaks to issues of performance, cronyism, diversity, corporate memory and quality decision making.
Whilst in the past, lack of attention on the part of directors attending meetings may have been tolerated, the current performance of directors is demanding consideration of not only who sits on the board but how long they sit there. For instances where board terms are specified, most terms are usually set at three years
Many boards find that setting term limits can be beneficial.
The advantages of setting term limits include:
• Incoming directors know that their contribution and commitment has to be measured within a limited time frame.
• Managing diversity is made easier through regeneration of the board whilst the gene pool can be continuously replenished.
• The board has a built-in balance of continuity and turnover.
• Passive, ineffective, or troublesome board members can be more easily rotated off.
• Board members experience a better rotation of committee assignments.
• A regular infusion of fresh ideas and new perspectives is brought onto the board.
• The board pays attention to, and gains a regular awareness of the changing group dynamics.
• Eliminates the sense of entitlement for those that wish to retire into a directorship.
The disadvantages of setting term limits include:
• There are some industries where it is important to have an experienced director with a good corporate memory, who has witnessed recurrent trends or cycles over time.
• There is a risk that large portions of expertise or corporate memory is lost at one time if board succession planning is not managed effectively.
• Extra attention and effort needs to be focused on managing the pipeline of potential directors.
“Length of service is not the issue. What needs addressing is performance and the sense of entitlement that can develop amongst long serving directors”
– Former Non-Executive Director, Listed Australian Bank
Boards without a term limit policy can experience:
• Stagnation, if no change occurs among the board members.
• Perpetual concentration of power within a small group.
• Group think and diminishing debate/ discussion over critical issues.
• Alienation and intimidation of the occasional new member.
• Tiredness, boredom and loss of commitment by the board.
• Loss of connection to dynamic changes in demographics, strategy or environmental factors.
Under this structure, a director’s term or number of re-elections is limited in advance.
Commonly, the term is set at three years with mandatory retirement after two or three, three year teams.
For example, Singapore Airlines mandates a 6 year maximum term for directors as do some super funds.
Fixed Term plus Hurdles:
This is where the maximum term is mandated, for example, two three year terms.
If a director wishes to seek re-election for a third term of three years, then a significant majority of other directors or two-thirds of the board must also sanction the reappointment.
Should a fourth term be sought, then all directors must unanimously agree to the reappointment.
In addition to director sponsorship, the process could be supplemented with a shareholder or stakeholder engagement process.
Performance Process or Hurdles:
This process involves the review of the performance of directors against stated goals or their general contribution to strategic development of the organisation and board.
This process needs to be transparent and independent amongst the directors, but the results confined to the board, chair and head of the nominations committee.
The simplistic survey approaches currently employed are insufficient to effectively evaluate a director’s contribution, and hierarchical line management performance models are usually not appropriate to the peer and matrix structures found in boards.
“I was on one board for more than twenty years and resigned due to the perception that my tenure was too long, but had much more to give. I was on another board for about three years and felt I had made my contribution. Every situation is different”
– Former-Chairman, ASX/20
Adopting limits for directorship terms can provide a release valve for under-performing directors. However, it does not directly address the issue of board performance.