Board Refreshment Disclosure

January 17, 2017

Board, committee and even individual evaluations have been mainstream practices for boards and individual directors seeking to improve their performance and it has been increasingly common for boards to create matrices identifying the experiences of current directors, matching them to the skill sets most needed by the company on whose board they serve.  Boards are now supplementing these practices with a focus on tenure and refreshment.

This development comes as investors and proxy advisory firms scrutinize director tenure.  For example, Glass Lewis states in its Global Policy Survey that lengthy director tenure may be a “potential obstacle to adding new skill sets and diversity to boards and...a potential risk to the independence of long-serving directors.” While this can be a sensitive subject, there are some practical steps that boards can begin to take prior to the 2017 proxy season.

  • Start the conversation and know your numbers. The nominating and governance committee should begin the conversation by understanding the underlying facts—average and individual tenure, the interval since the election of the last new director and upcoming director retirements.
  • Critically scrutinize board skills and mix. The nominating and governance committee should critically review the board skill set compared to the current and projected company needs and reflect on diversity recruitment progress. This should be more than a routine update or “check the box” exercise, particularly given the rapidly changing business and competitive environment for many companies.  For example, companies may need directors with social media, emerging markets or digital marketing backgrounds— skills that might not have been relevant a few years ago.
  • Decide whether change is needed. The goal is not to remove long-tenured directors from the board. Instead, the nominating and governance committee, and the board, should be clear about each director’s contributions and value, regardless of tenure. As Glass Lewis stated in its most recent guidelines, “ a director’s experience can be a valuable asset to shareholders because of the complex, critical issues that boards face.”  As a result of this exercise, the board should be confident that it collectively has the right skills or should identify any significant gaps and consider how to address them.
  • Consider the path forward. Some companies have made director tenure a “numbers” game by adopting mandatory tenure limits. This is not a majority practice and not universally endorsed by institutional shareholders or proxy advisory firms, although the new ISS Quality Score question gives “increasing credit for increased  proportions of the board represented by directors with less than six years tenure, up to one third of the board.”  It avoids the delicate task of asking a director to step off the board before the mandatory retirement age and blunts independence concerns related to tenure.  However,  it operates indiscriminately and may result in qualified directors departing at an inopportune time. Other approaches to refreshment can include increasing board size—sometimes in anticipation of an upcoming retirement. For example, a 10 person board may add an 11th director anticipating a director retirement in the next few years.  Regardless of the practice chosen, it is crucial for the board to have and consistently execute a plan to address any skill gaps.
  • Tell the shareholders what you are doing.  Board tenure and refreshment is becoming part of the regular, ongoing dialog with shareholders. The company should be comfortable addressing the topic and its approach in its proxy statement, corporate governance guidelines, and investor relations and shareholder engagement programs. In particular, companies and boards should focus on the section of the proxy statement that discloses individual director skills and articulate how the contributions of each director—particularly directors with longer tenure where shareholders might naturally question the relevance of an individual’s skills and experiences—contributes to the overall effectiveness of the entire board.
Like most governance matters, the solutions to these issues are not “one-size-fits-all” exercises. A board should not feel pressured to adopt a process that will not enhance its ability to advance and protect shareholders’ interests. However, as investor pressure increases and other companies address these issues more publicly, not tackling the topic will increasingly become a governance vulnerability.