Contact one of our experts

Generating Change at the Top: Director Tenure and Board Renewal

Director-Tenure-and-Board-Renewal-300x225Recent media commentary has looked at what’s being described as a “generational change” in the boards of many ASX-listed companies.  Long-serving board chairmen aged in their 60s and 70s are retiring, with commentary suggesting this may open the door to a new generation of board leadership.

While movement at the top end of town attracts the attention of the business news writers, the issue of succession planning and renewal is an important one for all boards.

As the governing body of an organisation, stable leadership in the board and directors with a corporate memory for the organisation can be real assets.  However, there can be down-sides from boards that are too static.

Directors who have worked cohesively together over many years can fall into poor decision making habits.  Group-think and a tendency to deal with issues “the way we’ve always done” can reduce a board’s ability to innovate and position the organisation well for change in dynamic environments.

For non-executive directors, long periods of service may compromise independence.  In its recent revision of its recommendations on good corporate governance, the ASX Corporate Governance Council suggests that after 10 years’ service, a board director’s independence should be regularly reviewed to assess whether they have become too close to management to be considered independent.

Long tenure periods may be a contributing factor to the slow improvements in gender diversity on boards.  Despite a strong focus on increasing the number of women on boards, in September 2014 only 18.6% of directors on ASX200 boards were women.  While this has doubled in the last five years (in 2009, 8.3% of ASX 200 directors were women), it is still slow progress.  When directorships turn over, there is an opportunity to consider how to build the diversity of skills, backgrounds and experience on the board to maximise performance.

Slow rates of renewal and long director tenures raise debate about setting maximum terms for board directors.  Maximum terms are probably too blunt an instrument, and would bring their own problems such as losing talented and innovative directors due to an arbitrary time limit.  There may be some benefit in organisations setting guidelines for tenure, with some flexibility, to keep clear focus on the issue.

It is important for all boards, and the members who appoint them, to be thinking about board tenure and making sure that a measured process of succession planning is in place.  Board renewal and recruitment is an important part of long-term success.  It should be an ongoing part of good governance, not a once-in-generation shift.

About the author

TMS Consulting