Company directors can sit on boards for decades. Are term limits the answer?

Steering a large company successfully is no mean feat. As companies grow more complex in an increasingly turbulent business environment – so, too, do the responsibilities of their board members.

While they aren’t involved in day-to-day operations, non-executive directors hold the highest decision-making authority within a company. Collectively, the board is responsible for a company’s strategy, compliance and asking tough questions of its management team.

But these roles also often come with significant status, prestige and influence – especially on the boards of publicly listed companies. There is typically no shortage of people willing to fill them, and those already on a company board are often reluctant to leave^[1].

Some directors stay on company boards for a very long time. According to a report^[2] in the Australian Financial Review, among the boards of Australia’s 300 largest publicly listed companies, 33 non-executive directors have held their seat for more than 20 years.

Companies can set their own rules on director tenure, as there are currently no specific term limits under Australian Securities Exchange (ASX) guidelines or any other regulations. This can hinder board renewal, a process that’s essential for a company’s health.

Now, the Australian Prudential Regulation Authority (APRA), which establishes and enforces standards for the financial services industry, is leading calls for that to change.

According to APRA Chair John Lonsdale, terms should be capped at 10 years^[3] for banks, insurance companies and super funds.

Here are the key arguments for and against such a rule – and why some of the broader problems facing corporate Australia may require a more nuanced solution.

A fresh pair of eyes

Asking how long directors should be allowed to sit on a board is a bit like asking how long a piece of string should be.

There are two opposing factors at play.

The first, underpinning APRA’s proposal, is the argument that over time, directors’ ability to think independently is compromised.

The whole rationale for having non-executive (independent) directors is they bring an independent view to a company’s strategic decision-making. Their role is to ask tough but important questions of management.

But long tenures, it’s argued, can also lead to complacency and an acceptance of the status quo^[5].

Shared, overlapping tenures between board members, or with the chief executive or founder can compromise a director’s independence and undermine their ability to challenge and question management.

This week, some of Australia’s largest super funds called on^[6] software giant WiseTech Global to appoint “genuinely independent” directors.

A recent review^[7] (ordered by WiseTech’s board) found co-founder Richard White had misled the board about some of his personal relationships. But the board took no action against him. Four independent board members, including the chair, resigned in February.

Read more: Billionaire entrepreneurs can make for bold businesses but often with fewer checks and balances^[8]

Wisdom and experience

On the the other hand, the argument in favour of longer tenures highlights the significant knowledge and experience gains that can accumulate over time.

Non-executive directors are part-time and attend infrequent meetings. This can limit their access to the critical information necessary for them to carry out their role. Time served on a board provides directors with valuable inside knowledge.

For companies, the question is whether the knowledge gains provided by long tenures offset the costs of reduced independence.

We’ve been here before

This is not the first time that calls have been made to impose limits on company directors’ length of tenure in Australia.

Back in 2013, the ASX Corporate Governance Council proposed^[9] non-executive directors be deemed no longer independent after nine years.

However, this proposal faced strong opposition^[10]. It was ultimately watered down^[11], allowing boards to determine whether a director’s tenure has impacted their independence.

Last year, former Commonwealth Bank chairwoman, Catherine Livingstone, reignited the tenure length debate at the Australian Institute of Company Directors’ annual summit^[12], suggesting corporate Australia “normalise terms that are six years or less”.

What does the research say?

To better understand the effects of director tenure on their ability to contribute, my previous research^[14] has analysed the contributions and performances of 37 non-executive directors across the financial services industry.

Through boardroom observations, interviews and peer reviews, I found support for each side of the tenure debate.

Directors’ ability to contribute increases over time as they gain confidence and knowledge. It may eventually decline, but this “stale in the saddle” observation was found in directors with excessive tenures of more than 25 years.

Meanwhile, ample evidence showed directors with tenures between nine and 17 years were able to offer sustained and valuable contributions. This suggests long tenure doesn’t necessarily hinder directors’ abilities to contribute.

More than one board seat

A key differentiator between contributing and non-contributing long-serving directors was that they typically held positions on other boards.

This runs counter to a common criticism that some directors can end up being spread too thinly^[16]. But it supports research^[17] indicating the more time directors spend thinking about their governance duties, the more attention they pay to them.

An effective board is one where all members are contributing well, irrespective of tenure.

A better approach may be to regularly assess the performance of all directors – not just the longer-serving ones – to ensure they have the motivation and required skills and knowledge to fulfil their role.

References

1. ^{^} reluctant to leave (www.tandfonline.com)
2. ^{^} report (www.afr.com)
3. ^{^} 10 years (www.apra.gov.au)
4. ^{^} Detail from Bianca De Marchi/AAP (photos.aap.com.au)
5. ^{^} acceptance of the status quo (eprints.qut.edu.au)
6. ^{^} called on (www.afr.com)
7. ^{^} review (www.abc.net.au)
8. ^{^} Billionaire entrepreneurs can make for bold businesses but often with fewer checks and balances (theconversation.com)
9. ^{^} proposed (www.asx.com.au)
10. ^{^} strong opposition (www.asx.com.au)
11. ^{^} ultimately watered down (www.asx.com.au)
12. ^{^} annual summit (www.afr.com)
13. ^{^} Joel Carrett/AAP (photos.aap.com.au)
14. ^{^} previous research (eprints.qut.edu.au)
15. ^{^} Rawpixel.com/Shutterstock (www.shutterstock.com)
16. ^{^} being spread too thinly (theconversation.com)
17. ^{^} research (eprints.qut.edu.au)