A Blog by Jonathan Low


Dec 29, 2014

Corporate Boards' Longest Serving Members Are Facing Investor Pressure to Resign

Respect for elders is a hallmark of certain cultures. Their wisdom and experience are valued as is the implicit reverence for continuation of the species.

But that would not be this culture, which is to say any western enterprise intent on maintaining a rising stock price and the bonuses that go with it.

Investors are pushing institutions to refresh board composition in order to add members more familiar with the latest developments in technology and finance. They are doing so in the face of increasingly entrenched boards whose members, on average, are turning over even less frequently than they have done in the past.

Aging Baby Boomers who are loathe to let go are part of the problem, not unreasonably because they believe they have presided over an era of unprecedented growth - and because they recognize that given the economy's relative stagnation, there are probably no other places for them to go. There is some irony in that the first generation of tech disrupters are now finding themselves being disrupted out of their sinecures as their connections and skills are leapfrogged by younger cohorts.

There is a danger in too hastily discarding the tacit knowledge which long established board members offer. But this is an economy, for all its belief in data, that is not too respectful - or particularly knowledgable -  about converting that data into wisdom. JL

Joann Lublin reports in the Wall Street Journal:

Despite broad debate over bringing new players into boardrooms, corporate boards have grown more entrenched lately. Companies in Standard & Poor’s 500 stock index elected 371 new independent directors this year, down from 443 a decade ago.
Time may be running out for senior statesmen on U.S. corporate boards.
Traditional institutional investors like State Street Corp. are stepping out from behind the scenes and publicly taking aim at long-serving directors for the first time. Joining with activist investors, such critics say veteran board members often can’t keep up with rapid changes in business.
Companies insist that deeply experienced board members contribute valuable insights in turbulent times. But the new push means more boards will face pressure to find fresh blood and send some highly tenured members packing.
State Street Global Advisors, the asset-management arm of the major financial-services firm, recently embraced a policy that takes a skeptical view of boards with average tenure above nine years. The unit opposed the re-election of about 320 directors between March and June 2014, estimates Rakhi Kumar, its head of corporate governance.
State Street will not say which board members it voted against over tenure, and the votes were largely symbolic. Still, companies will get the message that the big shareholder isn’t happy. “Unless those boards change, we will hold them to the exact same standard in 2015,” Ms. Kumar says.
BlackRock Inc. expects to unveil a director tenure policy in late January, says a person familiar with the world’s largest asset manager. “Anyone with a majority of long tenure [directors] should be worried.”
And Vanguard Group Inc. soon will raise tough questions with companies whose boards have “significantly above-average tenure,” says fund controller Glenn H. Booraem. He handles corporate-governance issues for more than $1.5 trillion in U.S. equities.
O’Reilly Automotive Inc. disagrees with such criticism. As of its latest proxy statement, eight of nine directors had served the car-parts retailer for 10 years or longer. The board “is very committed to retaining extremely experienced individuals,’’ says Mark Merz, an O’Reilly spokesman.
Expect more mainstream investors to add their voices to the chorus in 2015, predicts Patrick McGurn, special counsel for Institutional Shareholder Services.The big proxy-advisory firm this year began to penalize businesses with a significant number of long-tenured outside directors when it graded their governance practices. (Such grades help investors decide how to vote on proxy ballots.)
Behind closed doors, “boards are aware of the tenure issue and are concerned,” says Michele J. Hooper, a governance consultant and director of UnitedHealth Group Inc. and PPG Industries Inc.
Despite broad debate over bringing new players into boardrooms, corporate boards have grown more entrenched lately. Companies in Standard & Poor’s 500 stock index elected 371 new independent directors this year, down from 443 a decade ago, according to a study by recruiters Spencer Stuart.
And while a large majority of the S&P 500 has mandatory retirement for directors, more boards have raised their age limits past 75, the study showed.
Among Russell 3000 companies, 7,197 independent directors—about 31% of the total—have served a decade or longer, an analysis for The Wall Street Journal by governance researchers at MSCI Inc. found. That compares with 6,556, or nearly 29%, in 2009.
Activist investors campaigning for board seats often argue that long-serving directors have grown too cozy with management.
During a proxy fight this summer at Bob Evans Inc., activist Sandell Management Corp. won four directorships after decrying the restaurant and food company’s “stale and entrenched” board.
The revamped Bob Evans board soon approved 15-year term limits for members. Chief Executive Steve Davis disliked the move, a person familiar with the matter recalls. His fellow directors ousted him Dec. 14.
Only 16 big businesses impose board term limits, Spencer Stuart’s study said. Among them is Target Corp. The retailer restricts tenure to 20 years —or five years after a director retires from active employment—to ensure the board “offers diverse perspectives and fresh ideas,” a spokesman says.
Other boards hold open the door and hope long-serving members will take the hint. Ingredion Inc., for example, lacks a formal term limit but expects directors to serve no more than 12 years.
“You want to help people move on,” says Ilene Gordon, CEO of the ingredients maker. The informal arrangement led a 12-year board member to leave in 2011.
Last year, Time Warner Inc. decided that the average tenure of its outside directors “will generally not exceed 10 years” because the media giant prefers a mix of tenures, this governance policy states. Directors’ tenure currently averages about 8.2 years.
“Investors liked it,” says Fred Hassan, a Time Warner director since 2009.
Ms. Hooper, the governance consultant, expects numerous boards will shake things up by identifying new skills they’ll need in the future—and in the process, signaling to certain members that it’s time to move on.
Today, a disconnect exists between “a board succession plan that looks out over a number of years—and the reality of boards taking (succession) one retirement at a time,’’ says Julie Hembrock Daum, head of Spencer Stuart’s North American board practice.
Some businesses ignore investor complaints about long-tenured directors. Consider Monster Beverage Corp.
All five non-management board members of the energy-drink manufacturer have served at least 10 years. State Street opposed the June re-election of three appointed more than two decades ago, concludes a review of its disclosed director votes by researchers Proxy Insight Ltd. for The Wall Street Journal. (State Street declines to comment about individual companies.)
The trio kept their seats. Monster’s share price has soared since 2005, a spokesman observes. “I am not certain any shareholder would want board changes with that kind of performance.”
It’s a similar story at rocket maker Orbital Sciences Corp. State Street unsuccessfully opposed the April re-election of three long-serving directors, Proxy Insight found. They included Frank Salizzoni, a former CEO of H&R Block Inc. who objects to the asset manager’s new emphasis on tenure.
“It’s a matter of how good directors are, not how long they’ve been directors,” Mr. Salizzoni says.
Still, he agrees that older directors should step down at a certain age. He resigned Orbital’s board July 22, the day after he turned 76.


Post a Comment