Board Refreshment: Keeping the Board, Nimble, Diverse, and Independent
March 30, 2018
Board refreshment continues to be a hot topic with investors. Now more than ever, companies are faced with competitive pressures from new technologies and shrinking market share. In response, activist investors are recognizing that a long-entrenched board has an adverse impact on growth and value creation. In this Farient brief, we look at the effectiveness of refreshment policies in accelerating change in the boardroom, and in the overall quality of management.
Investors have been successful in making board refreshment a priority issue. In our analysis of S&P 500 companies, we found almost 81 percent of companies have a mandatory retirement age in place, with the most common ages being 72 (30.9 percent of companies) and 75 (26.9 percent of companies). Four companies – Chesapeake Energy, EOG Resources, Henry Schein and The Progressive Corporation – have set 80 as their required departure age.
Not surprisingly, mandatory retirement policies are correlated with the average age of directors. Companies with higher retirement ages tend to have directors, on average, who are older than those at companies with policies mandating earlier retirement. Evaluating the ages of directors in consideration of these two policies, we found that 16.4 percent of board members in the S&P 500 are over 72 years of age, while 7.5 percent are 75 or older.
Board Refreshment Improves Performance
We also found that age-based retirement policies have the potential to reduce average board tenure. This is favorable to investors because academic research has found boards with an average tenure of more than nine years – especially those of high-growth companies – underperformed compared with peers that have lower average tenure. Our analysis showed companies with retirement policies of 75 and younger have a median average board tenure of 8.4 years. Conversely, companies with older retirement policies (75+), have a median average board tenure of 9.7 years. Despite this, 36.1 percent of directors have crossed the nine-year threshold of effectiveness in the S&P 500.
Board tenure and mandatory retirement age policies vary from country to country. Farient’s recently released “2018 Global Trends in Corporate Governance” looked at board tenure across 20 countries and found a wide range of practices in place. Most countries in our study did not have a mandatory retirement age for directors. Instead, companies determined whether to impose age limits, although some general guidelines existed. For example, 75 was the prevalent retirement age in the U.S. While France has no maximum age limit, no more than one-third of directors of French firms may be over 70, unless specified in the company bylaws. Regarding tenure, directors serving more than 10 years were generally viewed as no longer independent. However, we found that most countries are turning to more robust director evaluations and nomination processes, rather than mandatory tenure limits, to refresh the board.
Board tenure and age limits matter. All investors, from pension and mutual funds to activists, are demanding the most skilled, engaged, and independent board members to ensure value creation and the sustainability of the company over the long term. To this end, accelerating board refreshment will drive innovation and growth, safeguard against complacency, and offer board service opportunities to the next generation of qualified candidates.