Mandated limits on service time are the only way to guarantee new perspectives and fresh ideas.

In this issue of Directors & Boards, we have sought to supply “Big Ideas for Corporate Governance”: fresh perspectives that can help you think about the work of boards in new, previously unforeseen ways. Of course, new ideas are not just valuable on the page. They have a tangible, intrinsic value when offered at the board table as well. Such is the reason that boards should always be on the lookout for prospective members who can bring expertise and experience to bear for a company’s benefit. 

As the business landscape continues to evolve, boards need experts in the areas of cybersecurity, human resources, sustainability and an endless array of other topics. At the same time, boards grow unwieldy and ineffective when they expand beyond 10 to 12 members. Taken in combination, these two realities create an unmistakable truth (or, at least, a thought that I believe to be true): All public company boards should include term limits for their directors. 

To ensure that I am approaching this idea with fairness, I will start by acknowledging that there are some drawbacks to the idea of universal board term limits. First, a mandated board term limit would result in a loss of many valuable directors, individuals whose institutional knowledge is of great currency to the companies they serve. It would also result in nom/gov committees having to spend an increased amount of time on activities like identification, recruitment and orientation of would-be and new board members. Finally, it would require boards and board chairs to devote extra time, perhaps on a more regimented basis, to building and maintaining board chemistry and cohesion.
 
In a 2015 piece for Harvard Law School Forum on Corporate Governance, Robert Pozen, a senior lecturer at MIT Sloan School of Management and a non-resident senior fellow at the Brookings Institution, argued that board term limits were unnecessary because of turnover in the executive ranks and the value brought by experienced directors.

However, in a time when technological advancement increases by the day, when employees are asking more and more of their employers and are willing to act on their discontent, and when the SEC is displaying an eager willingness to weigh in on topics that used to be the sole province of lawmakers, it has become important for boards to ensure that fresh perspectives on emerging topics are constantly available from their membership. In other words, the pros of term limits far outweigh the negatives. 

Boards benefit from fresh perspectives and new ideas. Every board member I have spoken with during my time as managing editor of Directors & Boards has indicated the hard work they undertake to remain up-to-date on matters affecting their companies, and that effort should be applauded. However, it is impossible to become an expert on every topic a company will face, especially ones as layered and complicated as cybersecurity or artificial intelligence. It will be inevitable that a board will have to bring on new directors with existing expertise on issues that can affect company success. Painful as that may be, that necessity is made much easier to accomplish when members are cycled off of the board in an established fashion. 

The decision-making of boards is better when its directors feature a diversity of thought, experience and background. Nom/gov committees are less likely to seek out that diversity when it will add to an already sizeable and established board. However, if that search for new perspective is mandated via term limits, diverse candidates will be much more likely to get an opportunity to join and benefit boards. 

After an extended amount of time on a board, it is only natural that some members — even if on rare occasions — will begin to stagnate or become less interested in their assignment. This can present itself in many ways. Maybe a member starts to miss board meetings on a regular basis. Maybe they stop participating in the meetings when they do show up. Perhaps they are argumentative or take the meeting into tangents with “pet peeves.” Are there ways to remedy these issues that don’t involve term limits? Yes, but term limits, first, will ensure that such a level of stasis isn’t reached and, second, will ensure that, if a board has to confront such an issue, that it can be remedied in a respectful manner that keeps conflict and hurt feelings to a minimum.

In “Corporate Boards Need Term Limits,” a June 23, 2022, article for Barron’s, Theresa Hamacher, chair of the board of Morningstar Funds Trust, argues for term limits, listing among her reasons an inability for directors to adequately self-assess, the overstated value of tenure toward a director’s effectiveness and the important role turnover plays in ensuring diversity. 

To me, tenure is not an issue of independence. I have heard it said that extended service on a board can reduce the independence from the company that is vital for a board member to successfully carry out the key roles of strategy monitoring and CEO evaluation. I believe a board member, valued as they are for their experience and proven decision-making prowess, can maintain independence from a company’s management despite a long stint as a director. 

Board term limits, whether it’s five years or 10 to 15 years (as is recommended by the National Association of Corporate Directors), ensure a regularly scheduled supply of fresh perspectives and ideas, both of which are invaluable for a company that is looking to ensure success in the long term. 

Bill Hayes is managing editor of Directors & Boards.