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Director Term Limits?

The lead author in the current edition of Directors & Boards makes a provocative statement: “Anybody who has been on a board for more than five years has become an insider. Period.”

Gary Sutton has served as a chief executive and board member of a number of public and private companies in his career as a specialist in business startups and turnarounds. He recommends that director terms should be restricted to five years. “Rational perspective is lost with time,” he writes in the cover story of the Spring Directors & Boards. “History is less relevant in a fast-changing world.” You can find a .pdf copy of his article HERE.

Sutton’s observations are timely and needing to be raised. Do directors become captives -- physically and psychologically -- of the organization after a period of time? As we continue to define and refine who on the board are insiders and who are outsiders, Sutton prominently shines a light in a corner of the debate where no one is really looking: the matter of board tenure as a defining characteristic of director independence.

Do you agree with the assertion that after five years a director becomes an insider? Do you disagree? Agree somewhat or disagree somewhat? Opinions should run strong on both sides of this matter. E-mail me your comments and we’ll publish a page or two of Letters to the Editor in the magazine as well as in the next issue of the e-Briefing.

I look forward to hearing from you. Our launch issue of this monthly e-Briefing was warmly received, and I trust you will enjoy and find value in this second issue. 

Jim Kristie is the editor and associate publisher of Directors & Boards.

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With the downturn in financial markets that began in March 2000 and the extraordinary contraction in venture investing, it’s never been more important for venture boards and management to embrace fundamental governance processes to maximize the probability of a successful outcome for their portfolio companies. What’s more, few VCs see a clear “Next Big Thing” on the technology landscape. That means they are looking for companies that are attacking important, existing problems with solutions that deliver measurable return on investment (ROI) to customers. Clearly, execution, discipline, and efficiency have replaced sizzle and big budgets as the hallmark of the best start-ups. Just as clearly, those qualities rarely develop without an engaged and attentive board.

When business is booming, there is less of the natural tension that commonly percolates through top-level teams. But when resources are constrained and prospects are less certain, those pressures can disable or break apart a board at just the time the company needs leadership the most. Here are some of the common pitfalls that plague start-up boards. This list serves as a useful self-check for both board members and managements concerned about how well the board is performing.

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Auditor Rotation: A Bad Governance Idea
Would you change your doctor every three years believing you’d get better medical attention?

By Wanda A. Wallace

Whenever a debacle grabs hold of the headlines, debate begins to offer “answers.” Intelligent public policy crafters must pause and sort out such answers from “really bad ideas.” The auditor rotation proposal is one of those bad ideas.

If you were forced to change your doctor every few years, do you believe you would receive better medical attention -- or worse? Is value added from the experience that doctor has had with your personal medical history? Or, is the benefit of “a fresh look” dominant? While the latter might be sought through second opinions, who would voluntarily embrace the idea of mandatory rotation of a personal physician?           

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James E. Rogers

Editor's note:  Each month, we ask a Directors & Boards reader  to comment on critical issues facing directors today.  This month, Jim Rogers discusses board and director self-evaluations and the next phase of corporate governance at Cinergy.

Do board evaluations and director self-evaluations really work?  Or, do they simply permit the participants to check the box as having completed them? 

Interesting question, and one we’ve worked through over the past couple of years.  In my opinion, they really work if structured in a way that solicits thoughtful, relevant answers.  Let me provide some background on how we’ve conducted our evaluation processes over the last couple years.  

Pursuant to Cinergy Corp.’s Board of Directors Corporate Governance Guidelines (first published in the Summer of 2002), the Corporate Governance Committee of the Board sponsors and oversees an annual performance evaluation of the Board to determine whether it is functioning effectively.  This evaluation focuses on the performance of the Board as a whole, concentrating on areas where performance might be improved. 

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Booz Allen: Forced Departures of CEOs Declined in 2003 But Remain Near Record Levels

Forced departures of CEOs declined last year, although involuntary turnover remains at near-record levels, according to the third annual survey of CEO turnover at the world’s 2,500 largest publicly traded corporations by leading strategy and technology consulting firm Booz Allen Hamilton. In addition, the study found that dividing the roles of CEO and Chairman does not result in superior performance, despite the expectations of governance activists.

The study comprehensively examines the linkages between CEO tenure and corporate performance, comparing CEO turnover in major regions and in specific industry sectors.  Among the findings:

• Companies that split the CEO and Chairman roles perform worse than companies with a single Chairman/CEO.  Dividing the two positions has been the norm in Europe for at least a decade, and has become the governance movement’s cause célèbre in the U.S.  But returns to investors are lower – 4.7% per year lower in Europe, and 4.1% lower in North America – when the roles are split.
  

• Globally, performance-related successions declined 29% from 2002, and represented 31% of all CEO departures, compared to 39% in 2002.  Overall, 9.5% of the world’s 2,500 largest public companies changed chief executives in 2003, compared to 10.7% in 2002. Still, the rate of CEO dismissals has increased by 170% from 1995 to 2003.

[Read the Full Article]

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June 7-8, 2004
Center for Professional Education Inc. (CPE) presents its 2004 Corporate Governance National Conference at the Ritz-Carlton, Tysons Corner in Washington, D.C. The theme of the two-day conference is "Meeting Shareholder & Regulatory Demands through Board & Management Excellence." Subscribers to Directors & Boards magazine receive a $400 conference discount! Visit their Web site http://www.cpeonline.com/conf/corpgov/ or call (610) 328-7086.

May-June, 2004
KPMG's Audit Committee Institute (ACI) will conduct its Spring 2004 Audit Committee Roundtable Series in 35 U.S. cities in May and June 2004. This series is titled "Oversight of Auditors," and participants will discuss the issues, challenges and leading approaches related to audit committee oversight of the internal and external audit processes. Executives can register for the Roundtable series on ACI's Web site at http://www.kpmg.com/aci or by contacting KPMG's Audit Committee Institute toll-free at 877-KPMG-ACI (877-576-4224) or via e-mail at auditcommittee@kpmg.com.

June 15-18, 2004
Kellogg School of Management at Northwestern University conducts a program on "Strategies for Improving Directors' Effectiveness." The program focuses on directors' fiduciary responsibilities, the duties of care and loyalty, and the distinction between duties and decisions of management and those of the board. Register online at http://www.kellogg.northwestern.edu/execed or call 847-467-7000.

November 14-15, 2004
BoardSource, formerly the National Center for Nonprofit Boards, presents its Leadership Forum, themed "Challenge Your Board Practices.". Discussions will include: how effective are boards?; what is the future of nonprofit leadership?; what does it mean to lead?; and, do your board committees have "static cling"? Register at http://www.boardsource.org/forum1 or call 202-452-6262.

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