Mainfreight is one of New Zealand’s most successful listed companies. At its recent AGM, its Managing Director made a spirited defence of how long some of his directors had been in office. His comments focused attention on a long-running debate about whether there should be limits to a director’s length of service. This is not a concern confined solely to the commercial sector. Recently, the longevity of the board of the Laura Fergusson Trust was also in the news.
There is an increasing trend Internationally for regulators to force boards to refresh their membership through some limit to how long directors can stay on boards. This intervention is often associated with a requirement for the number of ‘independent’ directors a board must have. It is common to associate a loss of independence with a length of service beyond something in the vicinity of 10 years.
The Mainfreight case is interesting. It has been one of the best performing of New Zealand’s publicly traded companies for a long time. Still, its four longest-serving directors have been on the board for an average of nearly 26 years. It is easy to see how institutional investors might be starting to make a case for board refreshment. Given the apparent struggles of the Laura Fergusson Trust, it is not surprising that its board, with its seven members having served for a combined total of 96 years, has come in for adverse comment.
So, what are the pros and cons of limiting director length of service?
The case against a limit
Arguments made against limiting director tenure typically include the following.
The case for limiting the length of director service
There is also a wide range of strong counterarguments. Here are some examples.
Are there alternatives to a maximum length of service?
It is hard to argue that periodically refreshing a board with a well-chosen new director or two is not a good idea. Vacancies need to be created to achieve this. So, if directors themselves do not know when it is time to go, what are the alternatives to a strict limit to maximum tenure?
The most obvious is to have an effective individual performance review process. Most board appointments are for a specified term. Arguably a director’s term should not be extended without evaluating their current contribution and its relevance to the needs of the board. However, robust independently facilitated individual director performance reviews are relatively rare. The usual excuse for not undertaking such a process - that it may upset relationships on the board - is likely a strong pointer to a board that needs change!
In the absence of director performance reviews, another option is to apply an active and transparent succession planning process. Done well this is, in effect, a continuing gap analysis comparing a board’s present capabilities with those it needs to grapple successfully with the challenges it faces.
Another option to trigger the appointment of new members would be to set a maximum average tenure for the board. The result would not directly challenge the longest serving board member when this maximum average tenure is exceeded. Other changes could be made to the board’s composition to bring the average tenure back below the limit.