Term Limits: Are They Really The Best Boards Can Do?



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by Tamara Paton in Work of the board
term limits

We tend to trust an experienced surgeon with 2,000 procedures behind her. We appreciate a beloved teacher as he approaches retirement. A certain restaurant chain even boasts the number of customers served.

Yet, long-standing corporate directors are viewed increasingly with suspicion.

Several countries have mandated firm term limits — 12 years in France — or disclosure regarding a director’s independence beyond a certain tenure — 9 years in the UK. In North America, shareholder advisory firm ISS scrutinizes boards where the average tenure of all directors exceeds 15 years.

Legally speaking, no law or regulation currently limits the length of board service in the US or Canada. Without strict rules from the regulators, many organizations have resisted the European example. In 2015, the Canadian Securities Administrators reviewed the corporate governance disclosure of 722 Toronto Stock Exchange issuers. Of those studied, only 19% have director term limits in place. Spencer Stuart conducted similar research in the US and found that 3% of S&P 500 companies place specific limits on director tenure.

In my mind, slow adoption isn’t a bad thing. Term limits are a blunt tool that eliminate effective and ineffective directors alike. I would rather see boards use their judgment in determining whether a colleague should stay or go.

Admittedly, some pretty knowledgable people disagree with me, particularly as the topic relates to the need for greater diversity on boards. According to the Canadian Coalition for Good Governance, a robust method of board renewal is essential for increasing gender diversity. After all, it is difficult to adjust board composition when directors are replaced infrequently. Think tank Catalyst, in partnership with the University of Toronto Rotman School of Management, points to data supporting this view:

“In 2015, half (50%) of [S&P/TSX Composite] issuers had a board renewal mechanism…Term limit policies were associated with higher board diversity in 2015, and the boards that renewed the most often and also had term limits were the most diverse. Also, among issuers with the lowest board renewal, those with board tenure limits had a higher level of gender diversity than those without them.”

I’ve written recently about the continued need for more diversity on boards. I am concerned, however, that our interest in diversity and board renewal will create boards that meet externally motivated criteria and membership targets. Will our interest in what can be easily counted distract us from organizational performance priorities?

Thinking back on my time as a director, I’ve worked with long-tenured directors who made admirable contributions. They brought deep institutional memory, rich relationships with management, and a strong connection to stakeholders. Imposing a term limit on these directors would have felt arbitrary and out of line with the organization’s best interests.

With that said, I’ve also worked with some walking disasters who remain entrenched for 25 years. (The directors described here come to mind.) If long-standing directors become too comfortable with the financial and social perks of board service, their defence of self-interest and status quo can be debilitating.

With these two scenarios in mind, I don’t see a clear correlation between director tenure and declining performance. Put simply, bad performance arises around weak, negligent directors. It is our responsibility to address their shortcomings on a timely basis, not when board policy prompts a glance at the calendar. Doing so is best for everyone involved.

Determinants of director performance are independent of time

As detailed in a survey conducted by Korn Ferry and Patrick O’Callaghan & Associates, directors point to integrity, trust, courage, values, and strategic agility as examples of the personal character qualities critical to a successful board. The passage of time does not erode these qualities; if anything, experience on a board may increase the trust shared and courage demonstrated by directors.

Lively performance management systems may better serve diversity

If a director is weak, why should an organization wait nine years to part company? Boards that rely on term limits for renewal may fail to invest in performance management systems, simply because the passage of time will eventually address the dead weight.

If we deal with director performance on a timely basis, we might actually have more board renewal than that which term limits facilitate. Strong performance cultures will nudge weak directors out and create a revolving door that brings fresh talent to the table.

The board should already have the performance management skills it needs

Given that the board evaluates and coaches the CEO, it should already have the tools it needs to manage its own behaviour and results. Board-buddy mentorship, coaching from the vice chair, and peer feedback can boost contributions right away. Doing so will help create a culture of accountability and high performance.

Perceived loss of independence is exaggerated

Long-standing directors might grow too cozy with management if both ranks are relatively static. This risk is minimized, however, when CEOs and CMOs average just 6.6 and 4 years in their roles, respectively.

Researchers further analyzed the performance of directors with at least 15 years’ experience in their roles. Economists at the University of New South Wales considered the performance of 1,500 companies from 1998 to 2013, including those with and without experienced directors. The results suggest that term limits do not increase director independence. Instead, seasoned directors actually counterbalance chief executive authority.

“Companies with a higher proportion of experienced directors paid their chief executives less, were more likely to change chief executives when performance faltered and were less likely to misreport earnings intentionally. These companies were also less likely to make acquisitions, which often expand a chief executive’s power while diminishing shareholder value. When they did, the acquisitions were of higher quality.”

The data suggest that experienced directors tend to keep the CEO at an arm’s length, speak more truthfully about about earnings, and resist wasteful spending sprees. Yet boards with fixed terms are showing these directors to the door.

To be clear, I am a huge fan of continuous improvement in the boardroom. I encourage performance management at the individual, committee and board levels. And I’m an advocate for board renewal, the prevalence of which will facilitate board appointments for aspiring directors. True renewal, however, does not arise out of simple counting. We owe the stakeholders we serve and represent better.

Your turn: Does your board use term limits to encourage renewal? How would you describe your experience?

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Term Limits: Are They Really The Best Boards Can Do?

by Tamara time to read: 4 min