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- Long tenure can create real governance risks, including reduced independence, blind spots on conflicts of interest and complacency.
- This can become even more of a concern when a director’s tenure overlaps closely with the CEO or chair.
- Board-specific succession charters may be preferable over a single mandated term. Skills matrices, independent board reviews and regular one-on-one chair conversations can make tenure and succession decisions objective rather than personal.
Mandatory tenure is once again a hot topic, with many speaking out in its favour. But is imposing a single fixed limit really the best way to balance fresh thinking, independence and corporate memory?
The fact that Australia does not have a mandatory board tenure limit is again in the spotlight as regulators and investors press for change. Australian Prudential Regulation Authority’s (APRA) proposed governance reforms introduce a 12-year default tenure limit for non-executive directors, supported by renewal and succession planning requirements. Leading proxy advisory firm ISS-Corporate reports that, in the eyes of investors, a preponderance of long-tenured directors may signal that the board is becoming too stale.
Distinguished Australian director and business leader Catherine Livingstone AC FAICDLife has also questioned whether longer tenure limits are appropriate, suggesting that six years might be a good point for balancing corporate memory with meeting the changing needs of the organisation’s strategic context.
Clearly, there are legitimate concerns about board tenure. The question is whether a single mandatory figure is the best solution.
The risks of long director tenure
The boardroom can be a very comfortable place to stay.
“A directorship brings esteem and mental stimulation, as well as income,” says Dr Natalie Elms GAICD, a researcher and academic in accounting and corporate governance. “My research has indicated that some directors are very reluctant to leave, particularly if they don’t have another board to go to and being a director has become part of their identity.”
Dr Judith MacCormick FAICD, an experienced director and CEO and managing director of BoardFocus board advisory, identifies a number of risks associated with protracted tenure.
“Long-term directors might no longer recognise conflicts of interest,” she says. “They might adopt a historic mindset, dismissing issues on the basis that they’ve been covered before. They may also be keen to protect their own or organisational ‘sacred cows’ and maintain the status quo of ‘the way things are done around here’.”
Five questions for directors to ask themselves.
1. Does my skill set still align with the organisation’s strategic direction?
2. Am I independent, or would a relationship with management or a fellow director make me hesitate to challenge a decision?
3. Do I still have the energy, appetite, preparation time and capacity for the level of risk this board now requires?
4. Is my contribution substantially adding value by improving board discussions and decision making?
5. Am I staying for income, status, intellectual stimulation or a sense of identity, rather than my value to the board?
Compromised independence
Independence can be compromised if a director develops a close relationship with management, especially the CEO.
“This can become a problem if a director, particularly the chair and the CEO have long, overlapping tenures,” says Elms. “At the same time, a director who has only been on the board for a couple of years could be visiting the CEO every weekend for a barbecue. So, while overlapping tenure is one consideration in director independence, it’s not the only one”
Some directors become complacent. For example, they might stop reading their board papers because they think they know everything. But again, as Elms points out, that’s not limited to those who have been on the board for many years. It’s also wrong to assume that skills automatically become outdated with longer tenure.
“Many directors are committed to continuously updating their governance and technical skills,” she says. “As long as that’s the case, a director could still be making an important contribution after 15 years. Their corporate memory can also be valuable, particularly at times of significant change or if the CEO is turning over.”
Rather than a fixed ideal, the correct length of tenure could depend on the specific circumstances and needs of individual boards.
“Boards make decisions as a group, and it’s really difficult to pinpoint a number without considering the spread of tenure and performance of the board as a whole,” says Elms.
“I’m also concerned that number could be seen as the standard for how long a director should stay which, for some, will be too long. Boards could decide on a good fit for them and put that in their charter, so it’s a guide rather than a mandate.”
Effective succession planning
MacCormick suspects that some boards avoid talking about succession planning because it feels too personal.
“They need to move beyond the emotion,” she says. “Boards should make tenure expectations clear as part of the induction process then make sure succession planning is on the agenda as frequently as every other meeting.”
A skills matrix – showing each director’s length of service, when they’re due for re-election and their expertise – can make succession planning feel more objective.
“Bringing in an independent reviewer can also help,” says MacCormick. “An external perspective makes it easier to assess whether the board has the right mix of skills, whether some directors have remained in their roles for too long and whether there are any behavioural or performance concerns suggesting it’s time for others to move on.
“Directors are generally expected to come to meetings well-prepared, contribute constructively, challenge management appropriately and add value to board discussions. It’s not only long-term directors who sometimes fall short.”
One-on-one conversations with the chair
MacCormick believes that a good chair will have one-on-one conversations with each director at least once a year.
“These discussions should cover the director’s future plans, tenure on the board and any concerns they may have about board performance,” she says. “Also, directors should feel comfortable about raising any issues they’ve noticed with other board members.”
She also believes chairs should also encourage directors to actively identify and recommend strong potential board candidates.
“Making succession planning and talent discussions a regular part of board conversations helps to ensure the board remains effective and well-positioned for the future,” she says.
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