Earlier this month, Robert Pozen, senior lecturer at Harvard Business School contended that a simple reliance on board term limits as an evaluation tool of corporate performance is based on “faulty logic”.
Concerns around extended tenure of directors typically include anxieties over compromised director independence and the development of a friendliness with management.
According to Spencer Stuart, the average tenure of directors in Canada rose from eight years in 2009 to nine years in 2014.
Mr. Pozen, however, highlights the disconnect in assuming that “lengthy director service means cozy relationships with management”. He notes the high rate of turnover amongst executive ranks as a mitigating factor against the establishment of cozy relations. He also points to a study conducted by the University of New South Wales which defines an “experienced director” as one with more than fifteen years of service on a board. The study concludes that experienced directors add value and are more likely to attend board meetings and contribute as members of board committees.
Along a similar vein, Canada’s Institute of Corporate Directors (the ICD) identifies board composition and renewal as vital to understanding board performance, but moves beyond a simple calculation of term limits to a framework aimed at building a renewal process that increases accountability and achieves the right mix of skills and experience for long-term effectiveness.
In its publication, Beyond Term Limits: Using Performance Management to Guide Board Renewal, the ICD states that “voluntary term limits have their place and can act as a backstop against excessive tenure lengths, which can lead to the perception of eroding independence. They may also provide some predictability around director position openings. However, mandatory limits could also be counter-productive to the good governance of Canadian organizations.”
Both the ICD and Mr. Pozen suggest that an active evaluation of board and individual director performance based on skills, company needs and industry norms should be the primary factors in assessing board composition, rather than a reliance on mechanistic term limits. As summarized by the ICD, “[w]hile term limits can be a supporting mechanism, relying solely on them to renew the board is insufficient and may be counterproductive to good corporate governance.”
Stay connected with Special Situations Law and subscribe to the blog today.