The Tradition of Low Turnover

The Tradition of Low Turnover

When directors are given what amounts to a lifetime position, real board refreshment can move at a glacial pace.

More than 40% of private board directors surveyed by NACD indicated one challenge to diversifying their composition was the lack of an open board seat. Studies have shown that public boards have a turnover rate in the single digits. The 2019 Spencer Stuart Board Index found that new directors represented just 8% of all S&P 500 directors.

By comparison, most private companies tend to lag behind the public peers in board composition trends, data shows.

 “It is telling that, absent the pressures faced by public companies, private boards clearly choose to maintain their latitude regarding board composition decisions,” wrote David A. Katz and Laura A. McIntosh in a post on the Harvard Law School Forum on Corporate Governance in 2016.

This has led some governance experts to recommend term limits even for private companies. Charles Elson, director of the Weinberg Center for Corporate Governance at the University of Delaware, has observed that, in general, no director wants to leave and no board wants the unpleasant task of asking someone to roll off the board.

“You have to create some kind of rotation policy,” Elson says. “When you get too comfortable, you lose your edge.”

Still, term limits are not widely embraced by private boards, according to the NACD Private Company Governance Survey. Just 22.9% of directors reported term limits to manage director tenure at their companies, the survey found.

Neither are mandatory retirement ages used widely. Only 17% of directors indicated their companies use age limits to manage director tenure. A mere 6% rated age ceilings as “very effective” mechanism for ensuring the right board composition, according to the NACD survey.

Christopher Austin, a partner at Orrick, Herrington & Sutcliffe law firm, is not a fan of term limits. He believes director tenure should be based on individual assessments. A director who is energetic, committed and adding value to the board should not have to roll off the board because of some artificial benchmark, Austin says.

Experienced director Randall Larrimore agrees that term limits and mandatory retirement ages should not be the way to refresh a board.

“To me, these are easy ways out and don’t address the needs of the company,” he explains. “A decision to ask a director to not stand for election is not personal, it’s business.”

Kent Lundberg, a director and chairman of the governance committee at Lundberg Family Farms, a rice and rice products company in Richvale, Calif., offered a solution for board refreshment that could allow private directors to ease off a board relatively painlessly. In the case of family business, which can be fraught with family politics, it could be a particularly useful method for a graceful exit.

“We’ve been discussing ,but have not yet implemented, the position of ‘director emeritus’ that provides a gentle ‘off ramp’ for family members who might be willing to step off the board, but who aren’t ready to step away,” Lundberg says.

A director emeritus would receive invitations to all board meetings, retreats and events and receive all board materials and communications. The director would have a voice at meetings, but no vote, Lundberg adds. The position might include a modest reduced stipend, and other benefits, he says.

 “Perhaps some long-serving members, who aren’t ready for full retirement, can be ‘enticed’ to step back into an emeritus role.” — Maureen Milford