This month's highlights from our Centre for Governance Excellence and Innovation, where we showcase research from around the world.
Recent academic research from Ying Dou, Sidharth Saghal and Emma Jincheng 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 they 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, it 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 nine 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.
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 6,500 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 five-year period (2010 to 2015) and found that entrenched firms delivered 18 per cent more shareholder return than non-entrenched firms.
Does Australia have “entrenched boards”?
Egan Associates has found that only seven per cent of independent non-executive directors had been on a board for more than 12 years, and only three per cent 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 stated earlier this year in its voting guidelines for the S&P/ASX200 companies that it may oppose re-election of directors classified as non-independent, and, relevantly, that a director serving 12 years or longer would not be classified as independent.
Currently the ASX Corporate Governance Council’s Corporate Governance Principles and Recommendations 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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