Board renewal: When is the right time for a director to leave the board?
During her 2024 Australian Governance Summit address, Catherine Livingstone AC FAICDLife, chair of Pacific National and chancellor of the University of Technology Sydney, advocated for a rethink on board tenures. Currently, it is typical for directors to serve for nine to 12 years. According to our research, shifting from this norm would help boards diversify and adapt to evolving strategic priorities. However, it is important to recognise that tenure is just one facet of board composition, and determining the appropriate length of director service should consider a range of factors that can influence a board’s capacity to govern.
Maintain a balanced approach
Board tenure is often positioned as a double-edged sword. While long-serving directors are highly valued for their deep firm and industry knowledge, enhancing their ability to oversee performance and strategy, prolonged tenure can compromise independence, particularly if a significant overlap exists with the management team. Extended tenure can foster an attachment to past decisions and a preference for maintaining the status quo. This poses challenges to strategic change.
Conversely, shorter-tenured directors introduce fresh perspectives, but require time to reach their peak contribution. Research suggests it can take up to two years to fully leverage a director’s skills, longer in larger, more dynamic organisations. When planning for board succession, consideration should also be given to the tenure of the CEO and how different — and shorter — board tenures could impact boardroom dynamics.
The opposing effects of tenure are reflected in the ASX Corporate Governance Principles. The commentary to recommendation 2.3 encourages boards to maintain a mix of tenures, “some with a longer tenure with a deep understanding of the entity and its business, and some with a shorter tenure with fresh ideas and perspective”.
One size does not fit all
Applying a blanket rule to board tenure could have unintended consequences. I conducted a case study of five boards operating in the financial services industry to understand the effect of tenure. Following a series of interviews, boardroom observations and peer assessments, the results showed significant variability in directors’ contributions at similar levels of tenure.
This was particularly evident in longer-serving directors. While some do become stale in the saddle, others maintain high levels of contribution. The sustainability of a longer-serving director’s contribution may depend on factors such as their board role and external directorships. Long- serving directors who held board leadership positions (board or committee chair) tended to be more engaged and willing to seek out external information than those without a leadership role at similar levels of tenure. Similarly, those who held multiple board positions benefited from a broader range of insights, enhancing their effectiveness despite lengthy tenures.
Barriers to board renewal
Boards may encounter challenges in executing their renewal plans if directors are reluctant to vacate board positions. Our research on directors’ motivations for serving on boards indicates financial rewards, intellectual stimulation and the prestige associated with the role are all key drivers. Of particular significance is the allure and social recognition that comes from being a board director. For some individuals, stepping down from their director role means relinquishing not just a position, but also a part of their identity. This poses a problem for boards that rely on individual directors to regulate their own board tenure.
Another barrier to board renewal is that directors do not always recognise when the quality of their contributions begins to decline. It is easy for long-tenured directors to justify their continued service based on their accumulated corporate knowledge. This problem is further complicated by the difficulty many boards face in removing underperforming directors mid-term, placing additional pressure on the chair to address performance issues.
Recognise/act on cues indicating when to go
Directors should be aware of cues that may indicate it is time to leave. Ask yourself the following questions:
Am I listening to others and actively seeking out new information, or am I relying solely on my existing knowledge?
What am I contributing to the board and are my skills still aligned with the strategic direction of the organisation?
Could my relationship with management compromise my ability to impartially challenge their decisions if necessary?
Are my motivations for remaining on the board aligned with the best interests of the organisation or am I driven by personal interests?
Strategies for managing board renewal
1. Set a renewal policy
A board renewal policy with guidelines around tenure is an important tool for board succession planning. A renewal policy can also provide a defence against longer-serving directors reluctant to leave on their own account.
2. Focus on the skills and experiences the board requires
Regularly assessing the board’s existing skill set against the firm’s strategic priorities will help to identify where additional expertise is needed and initiate a discussion on board renewal.
3. Conduct regular performance reviews
An effective board is one where all its members are contributing, irrespective of tenure. Annual performance reviews are an important tool for evaluating and managing director performance and can assist the chair in navigating difficult conversations with underperforming directors.
4. Consider the balance of tenure on a board.
Focus on maintaining a balanced and diverse mix of tenure. The potential negative impacts associated with long- serving directors can be offset by fresh perspectives from newer board members — and reduce the risk of groupthink.
Director views on long tenure
Anonymised, edited director quotes from Elms’ research show both sides of the tenure debate — from lived board experience.
For
“On the board I’ve been involved with the longest, there is a group of three of us who have been there now for nine to 11 years. If anything, we’d challenge more there than perhaps a newer director, simply because we know some of the things to challenge.”
“I’ve seen some directors who have been on the board 10 to 15 years, and they’re still active — and, of course, they do have a lot of history and knowledge.”
“I’m a person who will continue to challenge, no matter what. Doesn’t matter how long I’ve been there, I just keep [challenging] because my job is to say, let’s look at this, or look at that.”
“You can be on the board of a company that’s gone through three or four different iterations over a 10 to 12-year period. In fact, that director brings a lot of value in terms of corporate knowledge through those changes. And arguably they haven’t got too close to management because management has changed with all those different iterations in the company”.
Against
“You just fall into easy patterns of attendance, of diligence in inquiring, of energy — and you can become flat. That’s no good for anyone. It’s no good for the company.”
“It’s business as usual... they don’t interrogate, they accept the truth from the CEO, they accept the truth from the chair. I reckon if you’ve stopped asking questions, you’ve stopped adding value to the board.”
“On one board in particular, a director had been on the board for too long. The person was still contributing in a capacity sense, but had got a little stale. Some of the ways questions were being framed weren’t necessarily constructive.”
“The longer they’re there, it’s a little bit too easy... They know the business too well. The necessary drive to challenge, to have different thoughts or to be more interactive with the organisation can be diminished because, well, they’ve been there a long time, they know it all.”
Dr Natalie Elms GAICD is a senior lecturer within the Faculty of Business and Law, Queensland University of Technology.
This article first appeared under the headline 'Board Renewal’ in the September 2024 issue of Company Director magazine.
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