But Mr. Erlichman said he worries that the ability of a director to be independent-minded is often unrelated to tenure: “You could have a director here for 20 years [who] will not be ‘captured,’ and you could have a director there for one year and the director is captured before they even came on.”
Critics also argue term limits may arbitrarily force directors off boards at the peak of their knowledge and usefulness.
Director Peter Dey, who heads the governance committees of Goldcorp Inc. and Granite Real Estate Investment Trust, said directors don’t necessarily lose their independence after a certain number of years. He said it’s up to board chairs to move directors off the board who are not performing, rather than relying on term limits to avoid “a difficult conversation.”
“Applying term limits can cause boards to lose valuable contributors from the board and give underperformers some sense of being tenured,” Mr. Dey warned. “Every director should recognize that his or her term expires not later than the next shareholders’ meeting.”
But Robert Prichard, chairman of Bank of Montreal, does not see the bank’s 15-year term limit for directors as an alternative to doing performance reviews.
“Term limits should not be about underperforming directors; they should be about board renewal,” he said. “Even when all the directors are performing well, some renewal is desirable. A new director often brings fresh insights to the business and its governance.”
Bank of Montreal introduced a term limit in 2009 so that its board could “find the right balance between continuity and institutional memory on the one hand, and fresh eyes and ideas on the other,” Mr. Prichard said.
He said the board previously had a retirement age of 70 for directors, but found it was “an imperfect mechanism” because younger directors could end up staying for decades and older ones had only a few years of service. The new term limit allows directors to serve 15 years or until age 70, whichever comes first, but directors can serve at least 10 years regardless of the retirement age.
Bank of Nova Scotia introduced a similar term limit in 2011, allowing new directors to serve for 15 years or for at least 10 years, even if they reach the retirement age of 70. Average director tenure on its board is now nine years, down from almost 12 years in 2008.
“I think that’s not a bad zone to be in,” said Scotiabank director Thomas O’Neill, who helped to develop the new standard.
He said the goal is to have a balance of experience and “continued renewal” on the board, but said a relatively long term limit is needed because Scotiabank’s wide array of international holdings create a steep learning curve for new directors. “To get your sea legs at the bank takes longer than it would in a non-financial institution,” Mr. O’Neill said.
In Canada, term limits remain rare. Only 8 per cent of the country’s 300 largest public boards reported having them in 2012, up from 6 per cent a year earlier and 4 per cent in 2010, according to Korn/Ferry.
Although the proportion of boards with term limits is small, almost all of them are among the largest companies in Canada, including all of the six largest banks, as well as companies such as BCE Inc., Talisman Energy Inc., Fortis Inc., Shoppers Drug Mart Corp. and TransAlta Corp. The most common term limit is 15 years, the research shows, although they range from nine years to 20 years.
Vancouver-based governance consultant Patrick O’Callaghan said many companies with term limits are those most willing to hire comparatively younger directors in their 40s and 50s, but are concerned they could be on the board for two or three decades before hitting the retirement age.
Companies also find term limits make board planning easy, he said. “It provides more certainty around planning turnover and the skills and experiences that will be needed on the board.”
Mr. Pearce says BCIMC is encouraging companies it invests in to introduce term limits, saying business is changing so rapidly that he believes boards need a mix of newer directors who know about current trends.
“We’re not dogmatic about the limit, but after 10 or 12 years on a board, you ought to be thinking of moving on, and a board ought to be looking for a replacement. … When we look at companies and products and how things are running, I don’t think the old mindset is necessarily the one we ought to follow.”
Editor's Note: An earlier version of this story said Bank of Montreal allows directors to serve on its board until age 70, but allows directors to stay longer if they reach age 70 without having served at least seven years on the board. In fact, the bank has extended the minimum term for those directors to 10 years.Report Typo/Error