I had ample time to ponder questions of age and experience last month when seven friends and I hiked to the bottom of the Grand Canyon. On the arduous 10-mile hike back up to the South Rim, we encountered seemingly fit hikers in their 30s who struggled and complained every step of the way. We also met hardy, adventurous souls in their late 60s who left us in their dust. When it comes to climbing out of the Grand Canyon, it was clear that experience and preparedness take you farther than youthful energy alone.
This experience caused me to rethink my assumptions about age, ability, experience and fortitude. I suspect the same dynamic applies to the selection of board candidates. Based on outward appearances, it's impossible to predict who will turn out to be an especially effective director.
From the perspective of an institutional shareholder, issues of age and tenure on a board are integrally linked with other facets of board diversity. However, it's important to remember that as outside stakeholders we can only make inferences about the board's actual working dynamic based on limited information. The proxy offers only the directors' names, brief bios, and committee assignments. We recognize the limitations of this data set, and we would not set out to draw conclusions about an individual director's effectiveness based on these morsels of information. Instead, we endeavor to form an impression of the board overall and the probability that it will help us meet our objective of superior performance over a long-term investment horizon.
We derive this overall impression of the board's suitability based on a company's industry, country, competitor group, and station in its own life cycle. It is a gross generalization to say we expect to find more youthful directors on our tech and media company boards, more women on our consumer and specialty retail company boards, more engineers on our IT and software company boards, and more international executives on boards of our companies that are expanding globally … but it is also somewhat true.
I consider it a red flag when, for example, a fast-growing technology company in one of our clients' portfolios has a board that is 100 percent “pale, male and stale,” to quote the inimitable Nell Minow. Age alone is not the driver of such concern. Instead, it's our conviction that true diversity of thought, experience, and world views leads to more robust questioning about the potential directions the business could take and, ultimately, superior decision making.
On the matter of tenure
Tenure is another important consideration here. At T. Rowe Price, we do not advocate automatic term limits for directors. However, we have observed that a director's service on a board is generally characterized by a short, one-to two-year period of ramping up, followed by a longer, multiyear period of leadership and increasingly valuable contributions, followed by an eventual propensity to become accustomed to the board's routine and a tendency to rely more and more exclusively on information provided by the management team.
From an investor's perspective, it's ideal to have some board members passing through each of these stages all of the time. When a board has too many new members, we are concerned it may lack adequate industry knowledge. When a board has too many “lifers,” we are concerned it will spend too much time on box-ticking compliance exercises and not enough time on active, engaged dialogue.
Self-reflection for directors
For all these reasons, we don't spend much time pondering today's question, “Are boards too old?” Instead, we would urge all directors to look at their own boards' levels of diversity along multiple parameters and ask themselves:
• Have we added any new directors in the past five years?
• What's our average tenure on this board?
• Five years ago, what were the primary skills or professional backgrounds that were critical to understanding this company's strategy?
• What are those critical skills or professional backgrounds today?
• Is our board well positioned with the skill sets we will need in the near future? If not, what is our plan to fill this gap?
• For our board members who are retired executives, how do they stay current on the trends in this business? Do they rely exclusively on the board books supplied by management, or do they get out on their own and kick the tires?
• Are we as a board receiving the appropriate level of continuing education? Are there any individual directors on the board who could benefit from specialized training?
• When was the last time we conducted a candid board self assessment? After our most recent assessment, what specific actions did we take to address any significant gaps?
The right culture
Whether you are a veteran traveler of the boardroom trails or a young and tenderfooted new director, we believe board members who ask these questions of themselves are more likely to build a dynamic, functional, curious boardroom culture that, in our view, best serves the interests of the company. â–
The author can be contacted at donna_anderson@
troweprice.com.