Director tenure and board reappointments

Long-serving directors bring a number of benefits to boards: they provide stability; they “know the business”; they are a repository of institutional memory; they will tend to have more governance experience generally, not just with this firm; they are more likely to attend, and to contribute to, board meetings and board committees; and their skills, abilities and contribution to the governance of the entity are known, tried and tested.  But how long is too long?

Empirical research suggests that, “on average”, firm value is maximised with a director tenure of around nine years (Zhang, S. Zombie Board: Board Tenure and Firm Performance, 2013).  The ideal board composition at any particular point in time depends on the specifics of the individuals involved and the state of the company, so an explicit mandatory term limit is unlikely to be effective at optimizing board composition.

However, there are strong reasons to have a presumption that a director should only serve a limited number of terms on the same board. These include:

  • Independence: Long-serving directors can become too closely associated with the management and existing operations of the entity and cease to be truly independent.
  • Refreshment: Fresh ideas and perspectives need to be brought in over time as the entity’s environment evolves, and the business and governance requirements change.
  • Unconscious bias: Incumbents can be seen as indispensable, or a presumption is made that a search for someone better would not succeed. For example, maybe there is a belief that it is hard to get someone suitably skilled but without conflicts of interest. Well, unless a robust and objective search is carried out, you won’t know. Undertaking a search doesn’t preclude you from ultimately deciding to reappoint the incumbent.
  • Personal relationships: Boards build a camaraderie over time.  This creates a risk that personal friendships and wanting to “keep the winning team together” result in failing to look more widely.
  • Individual incentives:  Being reappointed means continuing to receive director’s fees and other benefits of board membership.  It also avoids having to search for another role and to start from scratch as a new board member on a different company.  These factors can make individual directors reluctant to acknowledge when it is in the company’s best interest for themselves to retire from the board.

While there is no specific regulation in New Zealand regarding director term limits or on other ways to manage this issue, there is some authoritative discussion: