When It's Time To Go

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?

 

Focus on Board Composition

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.

 

Long Tenure and Board Performance

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:

  • Gradually losing independence of mind and becoming more subject to Groupthink.
  • Getting too close to the CEO and executive team, leading to less willingness to challenge and question.
  • Losing the initial curiosity about the company and the environment.
  • Letting skills get outdated.
  • Losing passion for the role and the organization’s mission.
  • Failing to keep up with technology changes – both opportunities and threats.

 

“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.

 

Achieving Higher Turnover

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.

  • Term Limits: Term limits are not yet very common in Canadian public companies (and even less so in the US) but their use is likely to increase over time in response to stakeholder pressure. Term limits are more common in the non-profit sector – for instance in Canada, non-profits must elect directors for terms of four years or less, but there is no required maximum on the number of terms.
  • Mandatory Retirement: Some organizations prefer to specify a mandatory retirement age instead of imposing term limits. The most common retirement age has been 70, but many organizations are extending it to 72 or 75.
  • Offboarding: Offboarding is a focused board process to achieve turnover more quickly and expansively than through term limits or mandatory retirement, and more gently than through removal. For offboarding to work, directors must be aware of the possibility they may be asked to voluntarily resign. The process is respectful and honors the director for their service.
  • Removal: Outright removal through a vote of the board is a last resort, but the bylaws should allow for it in the case of serious failure on the part of a director to discharge their responsibilities or taking actions that are harmful to the company or its stakeholders.

The advantages and disadvantages of term limits and mandatory retirement are still debated, with reasonable arguments on both sides.

Pros

  • Boards need to have a mechanism in place that ensures board renewal. Term limits or retirement age provide a clear expectation for directors and assist the board in openly planning for transition.
  • It’s hard to ask a director to resign. Having an explicit policy removes this awkwardness, providing a respectful and efficient mechanism for the exit of low performing or problematic board members, not to mention dealing with a director who has made past contributions, but whose performance has diminished or is no longer a good fit.
  • The time limits or age limits do not have to be absolute. Boards can make exceptions or provide extensions.
  • Without these limits, there is too much dependence on the board chair’s ability to transition directors off the board at the right time. While some board chairs are skilled in this area, they are the exception.

Cons

  • It doesn’t make sense to lose experienced directors who are adding value to the board because of an arbitrary term limit or age. Their early departure means loss of their expertise, insight, and institutional memory.
  • A mandatory retirement age makes the role less attractive to recently retired CEOs and executives who may only have a few years left before they reach that age.
  • A board with a strong and effective evaluation process does not need arbitrary limits because directors retire based on their performance, not on their age or length of tenure.
  • It takes a lot of time for the board to continually recruit and onboard new board members – a more serious concern for non-profit boards.

Korn Ferry’s report Retirement Age and Term Policies suggested some questions a board could ask itself when considering director turnover.

  • Does our board regularly undertake a review of its composition needs and adjust board succession plans appropriately?
  • Does the presence or lack of a retirement or term limit affect our ability to attract new directors?
  • Is our director assessment program robust enough to identify and address problems with director performance?
  • Does our board chair have the experience, the will and the support of the board to handle performance problems?
  • Would we ask a well-liked director who doesn’t want to leave the board to do so if there were a valid reason, even if there is no extreme performance problem?
  • How do we balance rotation of fresh perspectives with long term experience and institutional knowledge?

 

What Should a Savvy Director Do?

 “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.

 

Ten Signs It May Be Time to Go

  1. Your passion for the cause has waned a bit.
  2. You find reasons to miss meetings.
  3. You don’t spend time preparing because it’s always the same stuff.
  4. You find little reason to challenge and ask probing questions.
  5. You’ve become a bit too close to the CEO.
  6. You’re not as curious as you used to be.
  7. It’s been quite a while since you upgraded your skills.
  8. You’re not keeping up with what’s happening in the industry or the community.
  9. You’re less than vigilant about oversight because you’re pretty sure everything’s okay.
  10. Your technical expertise is getting dated in light of major technology impacts on your sector.

 

“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.

 

Your takeaways:

  • There’s an increasing focus on board composition with emphasis on diversity, tenure, overboarding and director skills.
  • The length of directors’ board tenure is correlated positively with organizational performance, but only up to a point.
  • Boards frequently use term limits and mandatory retirement ages to achieve healthy board turnover.
  • When a director approaches their best before date, it’s time to go.

 

Resources:

 

Leave a comment below to get in on the conversation.

Thank you.

Scott

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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