In a time of rapid change, it’s vital for boards to ensure they have a vibrant team with the right mix of knowledge and skills to keep moving the organization forward.
But many boards find they don’t have the right processes in place to keep their membership fresh and relevant. And boards can find that their quest for renewal is blocked by a shortage of vacant seats, as sometimes directors stay on the board for a very long time.
When is long board tenure too long? What can boards do to encourage healthy director turnover? And what is the individual director’s obligation when nearing their best before date?
Board composition has become an area of focus in both the for-profit and non-profit sectors, with particular emphasis on diversity, tenure, overboarding, and director skills. In the publicly-traded arena, stakeholders, investors and rating agencies are paying a lot of attention to director turnover, and with good reason.
Today’s challenges – such as pandemic disruptions and social change - raise legitimate questions about whether a board of directors still has the right composition to address fundamental changes in the environment. Other factors under heavy scrutiny include concerns about director performance, boardroom diversity, and director overboarding (when a director is on an excessively high number of boards.)
Most boards want a healthy level of director turnover to reflect the organization’s changing needs and avoid the tiredness and loss of independence that can affect long-serving members.
Turnover makes it easier to diversify the board - bringing new perspectives to the decision-making process – and allows for rotation of committee assignments. New members bring new skills, different expertise, and fresh ideas, and they have the potential to improve group dynamics.
Non-profit boards find that healthy turnover allows the organization to spread its wings and engage many more people in the work, provides the opportunity to work with talented community members who can devote only a few years to board service, and enlarges the circle of committed supporters.
There is no one right answer as to the best way to ensure a healthy level of director turnover. Each board and each organization must struggle as to what works for them – subject, of course, to applicable codes, standards and regulations.
Research shows that a moderate amount of director turnover (three or four new directors over a three-year period) correlates with higher company value, and that firms with no turnover at all performed worse than those with high turnover.
It stands to reason that the length of directors’ tenure on the board is a factor when it comes to board effectiveness. Being a director is a complex job, and it takes a while to get up to speed. It may seem obvious that the longer a director is on the board, the bigger a contribution they can make. And that is true, but only up to a point.
When plotted on a graph over time, the shape of a director’s value to the board is an inverted ‘U’ – increasing over the first few years, then levelling out, and eventually declining. Don’t get me wrong, a director’s value doesn’t suddenly drop off a cliff. Long-tenured directors continue to make a contribution, but their value decreases over time. A rule of thumb for when that value starts to decline is about nine years.
For this reason, some governance codes and sector standards around the world – although not yet in North America – offer strong guidance to the effect that a director should no longer be considered independent once they have served on the board for a certain length of time, ranging from nine to twelve years.
Other factors contributing to the downward curve of the inverted ‘U’ shape include:
“Eventually, a director ﬁghts redundancy and relevance. A tipping point is reached if there is indeﬁnite service. It is inevitable. No one wants to be irrelevant.” – Richard Leblanc. How Long is Too Long for Board Directors? Canadian Business.
If a board wants to be more proactive about increasing director turnover and decreasing board tenure, the choices are term limits, mandatory retirement, offboarding, and removal.
The advantages and disadvantages of term limits and mandatory retirement are still debated, with reasonable arguments on both sides.
Korn Ferry’s report Retirement Age and Term Policies suggested some questions a board could ask itself when considering director turnover.
“Every board has one (or more) underperforming or dysfunctional directors, and if you don't know who it is on your board, then it is you.” - Richard Leblanc.
Here’s the tough part. What if it’s you? What if you’re the underperforming director? What if you’re past your best before date?
I suspect you know the answer. It’s time to go. Whether or not your board has term limits or a mandatory retirement age, you can relieve the board chair of the need to have the unpleasant conversation by submitting your resignation well in advance, leaving lots of time for the board to plan how to fill your seat.
Not doing so means putting your own needs above those of the organization’s – something no Savvy Director would do.
“The concept of directorship is not to serve as long as you want to; it is to serve as long as you’re needed.” – NACD quoted in Offboarding: The Diplomatic Way to Achieve Critical Board Turnover. Forbes.
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Scott Baldwin is a certified corporate director (ICD.D) and co-founder of DirectorPrep.com – an online hub with hundreds of guideline questions and resources to help prepare for your next board meeting.
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