This article is part of Board Games 2013, Report on Business's annual report on corporate governance. View the full rankings table: The best and worst governed Canadian companies in 2013.
Countries around the world have introduced governance guidelines urging companies to adopt term limits for their boards to ensure long-serving directors don’t become too closely aligned with management.
While there are no regulatory guidelines for director tenures in Canada or the United States, many other countries have either introduced limits on the length of time directors can serve or have added extra disclosure requirements to ensure companies have to explain why long-serving board members are still independent.
Richard Leblanc, a law professor at Toronto’s York University who specializes in board governance, said regulators impose term limits because companies are not moving on their own to replace directors as their service lengthens, and a term limit is an easy solution.
“Regulators are not going to come in and start assessing directors – that’s just not what they do,” Prof. Leblanc said.
“The regulator has very limited options; they typically have a [term] limit in years. They wouldn’t have to do that if boards had been assessing themselves and acting on the assessment.”
France’s Corporate Governance Code has the strictest guidelines, saying directors no longer qualify as independent if they have been on the board for more than 12 years. That means they are considered to be related to management and do not meet the criteria to serve in roles that require independent directors, such as serving on boards’ audit committees.
In practical terms, the French code means most directors cannot remain on a board past the 12-year mark because boards often try to have a small minority of “related” directors.
Hong Kong does not have a limit on service, but it requires companies appointing an independent director beyond a recommended nine-year limit to hold a separate vote for the director using a special resolution, which is a voting hurdle companies are not keen to contend with except in special cases.
Australia is also moving to develop firm rules around director terms.
Until now, its governance guidelines have simply recommended that boards “should be conscious of the duration of each director’s tenure in succession planning.”
But the Australian Stock Exchange has recently proposed an amendment to toughen the rule, saying service on a board for nine years or more would make a director no longer independent.
Other countries recommend term limits, but do not insist on them.
Spain’s Good Governance Code recommends a 12-year limit for independent directors, while Great Britain’s governance code says boards should annually explain their reasons for determining that directors are still independent if they have served more than nine years on the board.
South Africa and Singapore both say boards should do a “rigorous review” of directors’ independence if they have served more than nine years. Singapore also requires boards to explain why the directors are considered independent beyond the nine-year threshold.
Some countries offer general recommendations but do not propose a specific number of years for term limits.
Norway’s governance code, for example, recommends that boards consider whether a director is still independent of management “where a member of the board has served for a prolonged continuous period.”
Prof. Leblanc favours firmer term limits for directors because “if you leave it open, companies will drive a truck through it, and everybody’s an exception.”