The Importance of Board Refreshment
I recently stepped off from a large public board. Some question my judgement – after all, getting on a board is something so many are trying to do. Why would I ever decide to exit voluntarily? The answer is simple: I’d been a director on the board for 16 years, and although the company had changed significantly (4 different CEOs, numerous changes in directors, a large successful merger, and countless small bolt-on acquisitions and divestitures), it felt as though it was time to step aside and let others serve. As one who speaks publicly very often about the importance of board refreshment, it also seemed like it was time to practice what I preach.
The topic of board refreshment is one of the most important subjects of excellent board governance today. As companies face exponential change through technology and digital disruption, increased societal expectations of enterprise, and shifts in workforce dynamics, boards of directors should be constantly evaluating whether those sitting around the table have the best collective set of skills to serve the stakeholders and advise the executive team. Refreshment, however, is the most difficult thing to do because of one reason: It’s virtually impossible to ask a director to step down.
In addition to increasing the size of their boards to add new directors, many boards employ one of two tools to help them refresh their membership. According to a Fortune article, 70% of S&P 500 companies (up from 50% in 2015) use mandatory age limits to sunset director service. 6% of the group use term limits to facilitate board churn – a number that has stayed relatively flat over the same period of time.
Both tools, however, are suboptimal, and are likely used to avoid that difficult conversation – suggesting that a director’s skills are no longer as valuable to the board based on the direction of the company. I say they are suboptimal because times have changed, and the use of “mandatory retirement” carries over from a model of board service that is downright antiquated.
As one who has been a board director for almost 20 years, I’ve seen a great deal of change. We aren’t too many decades removed from the days when sitting or recently retired CEOs in the same city often sat on one another’s boards. Directorships were a sign of mutual respect and admiration, and a natural outgrowth of executives who ran around in the same social, philanthropic, and civic circles.
In a world of incremental growth and expanding global opportunities, this model seemed to work. There wasn’t much strategic disruption, M&A was not nearly as common, and boards were essentially “rubber stamp” meetings as evidenced by the preponderance of golf and/or fishing afternoons, and board meetings often held in enviable locations around the world. When directors joined boards toward the end of long and successful careers (around age 65) this probably made sense; 10 years on a board preserved independence and leveraged relevant, current executive experience.
However, in today’s environment, the practice of using age limits to refresh boards seems outdated and not fit-for-purpose. As some directors are now joining boards in their 40’s and 50’s, using a 72 or 74-year age limit to mandate board retirement means that people could serve on a single board for decades. It also assumes that once someone achieves that age, they are no longer fit to serve or valuable to the conversation in the boardroom. Frankly, this age limit seems not only irrelevant but ageist.
Similarly, board tenure policies are also a one-size-fits-all approach. Instituted primarily to ensure director independence, it assumes that over time, directors get too stale and perhaps too comfortable with the CEO and executive team. However, in the age of disruption and significant M&A activities, there are seldom companies that look the same as they did 10 years ago – with the same leadership and business portfolio. With the amount of change that companies experience, it may be wise to have some institutional knowledge that longer-serving directors can bring - particularly if there have been numerous changes in the executive suite.
I don’t get to just point out the problems. As a former boss once told me, “Anna, if you take a brick out, you have to put a brick back in.” So, here’s my brick back in.
Adjustments need to be made in two areas: (1) The expectations of director candidates themselves, and (2) The intentions of the board and governance committee.
Director Expectations
Put simply, directors should not expect board service to be the equivalent of Supreme Court appointments. We are not on for the rest of our lives (or until we are deemed physically or mentally unable to serve). Directors should join boards with the understanding that they will likely serve a number of years – until the strategic needs of the enterprise require new skills around the table.
Board directors should continually work to sharpen their skills as directors. This is particularly true for directors such as me, who have retired from full-time work. We are not “in the game” on a daily basis, and the world is changing significantly. With the pace of disruption, the impact of technology, the focus on sustainability and social imperatives, directors who are not lifelong learners will find themselves unable to add much value going forward. The good news is that through many professional publications and organizations such as NACD directors can sharpen their toolkit through in-person seminars and virtual webinars where they can network with subject matter experts to help them stay relevant and impactful in boardroom discussions.
Board and Governance Committees
A board and its governance committee should commit to maintaining a board that is designed for balance between fresh perspective and institutional knowledge. To achieve this, governance committees should consider the model of thirds: One-third of the board having less than 5 years tenure, one-third between 5-10 years, and one-third over 10 years. By doing this, the board can be deliberate about bringing in new perspective while maintaining institutional knowledge to ensure investor confidence.
This elevates the importance of board and director evaluations . A board should have a structured process for directors to provide input on the board management process, how every director contributes, and what additional skills might be needed. Doing this every year (or every other year) prevents the sudden realization that there is a gap. Such a process, coupled with a strong strategic understanding, informs directors of whether they have the optimal set of skills and experiences in the boardroom.
A strong governance process also necessitates communication of what board leadership requires of its directors. When a director is onboarded, it should be clearly communicated that although their experience and skills are highly valued, they are expected to continue to grow their capabilities as directors over time. Adequate funds should be set aside for director education and membership in organizations to improve director effectiveness.
As with all good teams, the true value of a board is measured in times of difficulty and challenge. Those events can happen suddenly, and when they occur, those sitting in the chairs around the table are responsible and accountable for helping steer the ship wisely. In my experience, there is nothing better than looking around the table in those moments and think, “this is the right group of people to handle this”. I’ve also felt the opposite, when in a difficult time, I’ve thought “I wish we had a few different brains around this table”.
Board refreshment requires outstanding leadership that is willing to institute a healthy board structure and culture, and courageous leaders who are willing to have those difficult conversations of asking people to wind down their service. With heightened scrutiny on board governance, expectations of directors both individually and collectively, and increasingly complex strategic challenges facing organizations, the collective talent around the boardroom is becoming ever more important. Although change appears to be happening slowly, I have no doubt that strong board leadership is on the rise today as more directors weigh in on this important topic.