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.
They’re called “zombies” – corporate directors who have served on a board for so many years they have lost energy for the job and are shuffling through the motions.
Regulators and investors around the world are taking aim at long-serving boards, calling for more fresh blood around the table and even term limits to ensure there is regular turnover of directors. Critics say long-time directors become too stale or too close to management, losing their ability to become strong advocates for investors, or to bring in new ideas.
“We think it’s healthy for a board and a company to have fresh ideas,” said Doug Pearce, chief executive officer of the $100-billion B.C. Investment Management Corp., who supports having term limits for directors.
In Canada, boards are aging as directors begin serving later in life. In 1997, 47 per cent of directors were 61 or older, and 8 per cent of those were over 70, according to data on 300 large public companies from consulting firms Korn/Ferry and Patrick O’Callaghan & Associates. By 2010, 60 per cent of directors in Canada were 61 or older – including 15 per cent of them over age 70.
The trend, combined with a gradual reduction in the size of many boards, has meant a slowdown in board turnover. A U.S. study by consulting firm Spencer Stuart found that S&P 500 companies appointed fewer new directors last year than in the previous 10 years.
The average tenure of directors in Canada is now 8.6 years, according to data compiled this year by the Clarkson Centre for Board Effectiveness at the University of Toronto. But there is a wide variation, with many large boards having at least one director with more than 20 years service.
Concerns about long-serving directors have led an array of countries to adopt rules to limit the terms that directors can serve, although no such rules are in place in Canada.
In France, public companies cannot call directors “independent” after 12 years, while Australia has proposed a similar rule with a nine-year term limit. Many other countries, such as Britain, do not prohibit directors from serving long tenures but require companies to spell out in public filings why they still consider directors independent after they have served for more than nine years, in essence creating a term limit for many boards.
Much of the pressure for change has come from shareholder groups, who say academic research shows directors are less effective as their terms stretch for decades.
A study published in July about U.S. boards concluded that the optimal term for directors on typical boards is nine years, after which they add less value for the company. The report, “Zombie Boards: Board Tenure and Firm Performance,” by Sterling Huang of INSEAD Business School, also concluded that the ideal term for directors varies by up to two years in either direction, depending on a company’s complexity and other characteristics, so the same term limit for all companies “may not lead to the intended outcomes.”
Richard Leblanc, a law professor and governance specialist at Toronto’s York University, said many directors grow attached to the work, the prestige and the pay, and are reluctant to leave voluntarily. He is concerned that long service makes some directors less independent from management as time passes.
“Boards can ossify and can become entrenched and stale,” he said. Since the global financial crisis, he added, “there’s less tolerance from shareholders. … There’s less tolerance for entrenched boards and there’s more acceptability of term limits, diversification and renewal.”
Two weeks ago, the corporate governance director for the largest U.S. pension plan – the $275-billion (U.S.) California Public Employees Retirement System – issued a call to investors to vote against reappointing long-serving directors on “stagnant boards” to keep directors from becoming too clubby, stale or cozy with management.
The call to action came after the Washington, D.C.-based Council of Institutional Investors, which represents large institutional investors, amended its governance policies in August to urge boards to consider directors’ years of service when deciding on their independence. “Extended periods of service may adversely impact a director’s ability to bring an objective perspective to the boardroom,” the council said.
The Toronto-based Canadian Coalition for Good Governance, which represents most of Canada’s largest institutional investors, has not called for limits to directors’ terms, executive director Stephen Erlichman said, but acknowledges that they can be an effective way to encourage more board turnover and make room for more women on boards.
By the numbers
|Average Board Games score||69||68||64||61|
|Percentage scoring below 50||10||16||24||24|
|Percentage scoring 80 or higher||29||29||21||11|
|Percentage with a majority of related* directors||4||5||6||20|
|Percentage of audit committees with a related* director||8||9||10||43|
|Percentage of compensation committees with a related* director||22||30||31||63|
|Percentage of nominating committees with a related* director||28||30||31||63|
|Percentage that do not split the roles of CEO and chairman||16||16||18||35|
|Percentage with a director share ownership requirement||82||81||78||24|
|Percentage with dual-class shares or unequal voting rights||14||14||15||22|
|Percentage with majority voting policies||88||65||58||n/a|
|Percentage with 'say on pay' votes||41||33||26||n/a|
|Percentage where all voting results are reported||89||79||62||n/a|
|Percentage with no women on the board||38||41||45||n/a|
|Percentage with one woman on the board, but less than 25 per cent women||46||47||44||n/a|
|Percentage with between 25 per cent and 33 per cent women directors||11||9||9||n/a|
|Percentage with at least 33 per cent women directors||5||3||2||n/a|
* Related as defined by Board Games criteria
2002 numbers are missing in some categories because the practice was not measured at that time.