Recent research from UNSW points to the value added by longer serving directors

Friday, 14 August 2015


    Value of longer serving directors shows that they have higher levels of commitment to board meetings and committees.

    Should Independent Directors Have Term Limits? The Role of Experience in Corporate Governance

    Financial Management, August 2015

    Entrenched Boards

    MSCI, April 2015

    Zombie Boards: Board Tenure and Firm Performance

    INSEAD Business School (Singapore), July 2013

    Recent academic research from Dou, Saghal and Zhang from the University of New South Wales points to the value added by longer serving directors. The research (final version due to be published later this year) examines the role of independent directors with extended tenures (defined as directors with at least 15 years’ experience) using a sample of US firms from the S&P 1500 from 1998-2013.

    The study found that longer serving directors were more likely to attend board meetings and also more likely to become members of board committees. In addition, firms with a higher proportion of longer serving directors on their boards had lower CEO pay, higher CEO turnover-performance sensitivity, a smaller likelihood of intentionally misreported earnings and made higher quality acquisition decisions.

    A 2013 study by the University of Singapore titled “Zombie Boards: Board Tenure and Firm Performance” also reviewed US firms from the S&P 1500 between 1998 and 2010. In contrast to the UNSW research, the University of Singapore study found that having a higher proportion of directors with tenure greater than 15 years decreased value. It concluded that “the empirically observed peak value in Tobin’s Q is around board tenure of 9 years”.

    Board tenure, independence and performance

    An issue that concerns the investor community is the relationship between board tenure and director independence. Institutional investors, proxy advisory firms and large pension funds have voiced concerns about long-standing directors on the basis that the independence of those directors from management may become compromised over time. Another related topic is mandatory director retirement age.

    Recent research from stock market indices provider and analytics firm, MSCI, titled “Entrenched Boards”  examined the performance characteristics of “entrenched” and “non-entrenched” boards of more than 6500 firms globally. It defined an “entrenched board” as, among other things, one with director(s) with tenure of greater than 15 years and/or which possessed director(s) older than 70 years old. The research considered average total shareholder returns over a 5 year period (2010 to 2015) and found that entrenched firms delivered 18% more shareholder return than non-entrenched firms.

    Does Australia have “entrenched boards”?

    Some commentators have voiced concerns that Australia may follow other countries that have specified or recommended director tenure limits, ranging between 9 to 12 years. For example, the UK Corporate Governance Code requires that boards of publicly traded companies “comply or explain” with respect to director independence after 9 years.

    Egan Associates has found that only 7% of independent non-executive directors had been on a board for more than 12 years, and only 3% had served for more than 15 years. This appears to be in line with the view of the MCSI research that “entrenched boards” are “virtually non-existent” in Australia.

    Nonetheless, the Australian Shareholders Association’s (ASA) stated earlier this year in its Voting Guidelines for the ASX200 companies that it may oppose re-election of directors classified as non-independent, and, relevantly, that a longer serving director serving 12 years or longer would not be classified as independent.

    Currently the ASX Corporate Governance Council’s Corporate Governance Principles and Recommendations (3rd Edition) do not specify a maximum length of board tenure. While the commentary for Recommendation 2.3 states that “the mere fact that a director has served on a board for a substantial period does not mean that he or she has become too close to management to be considered independent”, it also suggests that “boards should regularly assess whether that might be the case for any director who has served in that position for more than 10 years”.

    It remains to be seen whether the situation will change in Australia in future years. In general terms, while extended tenure may be seen to adversely affect director independence and diversity, long-serving directors may positively contribute to both institutional memory and organisational performance.

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