One of the hottest topics in governance today is director refreshment. (No, that doesn’t refer to what your board members have for lunch.) Boards comprised of long-serving directors do, in fact, tend to be “pale, male and stale” – i.e., comprised of old white men. Self-perpetuating boards are less likely to be diverse, and there is increasing evidence that companies with diverse boards tend to perform better (the evidence demonstrates correlation rather than causation, but it’s still evidence). There is also a plausible argument that self-perpetuating boards are less likely to challenge long-standing assumptions and practices, leading to board (and corporate) stagnation.
Perhaps it’s a poorly kept secret, but companies and boards have been concerned about this for years if not decades. Even boards that don’t engage in much introspection are often aware that some directors do not contribute much. As a result, companies and boards have tried all sorts of devices to force board refreshment – term limits and/or age limits having been the most common. Unfortunately, these devices have not worked very well, perhaps because they may be inherently ineffective, and no doubt also because companies often move the goalposts – age limits are waived (because keeping director X is deemed to be “in the best interests of the company”, whatever that means) or creep upward, term limits force good directors to retire, etc. And so, corporate America continues to search for the right approach. Some companies have adopted extremely long term limits (15 years), and others have said that average tenure may not exceed X years, but it’s too soon to tell whether these or other newer approaches will succeed.
However, one thing we really don’t need is governance by the numbers, which is precisely what some institutional investors propose. For example, the New York City Controller’s office has said that a director ceases to be independent after nine years of service. And now comes CalPERS – the California Public Employees’ Retirement System – one of the largest institutional investors there is, with the view that “director independence can be compromised at twelve years of service.” Thus, CalPERS policy now states that
- any director with 12+ years of service should be classified as non-independent, or
- the company should provide a detailed explanation regarding why the director continues to be independent.
I do not believe that a director ceases to lose independence after 12 years. For one thing, given CEO tenure these days, any director with 12+ years of service has likely seen CEOs come and go and thus realizes that he or she doesn’t owe anything to the CEO. Moreover, I’ve seen directors who remain independent after 20 years and others who lack independence the minute they walk into the boardroom. I’ve also seen independent directors who add nothing and non-independent directors who make significant contributions to the board. In other words, there is no magic formula for what makes a good director, and we should shy away from governance by the numbers.
I do, however, agree with the notion that a company should explain why each director serves on the board. In fact, I believe that this explanation should be provided regardless of a director’s tenure or independence, since neither is an effective measurement of director competence. And by “explain” I don’t mean the usual boilerplate. Rather, companies should give personalized rationales for each director’s election. The directors themselves can add much in this regard; some companies – particularly non-US companies – include directors’ personal statements in their proxy statements. I’ve seen them, and they are terrific. And one day (hopefully soon), we’ll see director videos embedded in the proxy statement or linked to the company’s website; if a picture is worth 1,000 words, how much would it be worth to have a video in which a director can say “I want to be on the company’s board because…”?
Let me know your thoughts.