According to a 2015 PwC study, 39% of board members said that they believed someone on their board should no longer be on it. Meanwhile, investors are calling for refreshment that will help maintain independent, objective viewpoints across company boards with a long-term view, whether that be through mandatory retirement or tenure limits.
While nearly 40% of the S&P 500 discloses a mandatory retirement age for their board members, according to a recent Equilar report—and far fewer have term limits—governance experts don’t believe that setting hard parameters like that is always the right answer. Instead, they recommend ongoing board evaluations that objectively assess the board as a whole and their fitness to continue serving.
At the recent Board Leadership Forum co-hosted by Equilar and Nasdaq, directors, consultants, legal experts and institutional investors gathered to discuss the most effective ways for boards to evaluate themselves, and how to decide what is the best time and who are the best directors to bring new life into the boardroom.
“Board evaluation is socially awkward,” noted one panelist kicking off the conference discussion.
The evaluation process is something that happens at almost every board, but the degree of depth varies widely. Indeed, few people enjoy being put through a rigorous evaluation process, but as former executives, most of them likely have been throughout their careers.
“It doesn’t have to be a ‘bad’ thing to be evaluated or even removed from a board—it may just not be a good fit,” said one attendee. “So why don’t we see it more?”
While investors and other stakeholders aren’t asking to see a detailed evaluation sheet and a numerical grade for each director, they do expect more transparency around the process from boards. According to one panelist, just 2% of the S&P 500 say they even have some sort of evaluation, let alone include the finer details in a proxy statement.
“There is internal and external pressure for clearer board evaluation processes from investors and regulators to see if disclosure is sufficient, and on the activist side, lack of clarity could be a vulnerability,” said one board member, who formerly spent years at a large institutional investor.
A detailed and agreed-upon process allows boards to address the diversity issue naturally and on an ongoing basis as well. Many stakeholders believe boards are not diverse enough in terms of gender, race, ethnicity and skills backgrounds. It’s not easy to tell directors they need to be replaced, especially if they are still contributing at a high level.
Very few boards do evaluations well, but those that do have rigorous processes typically embedded in the nomination committee. They don’t always go smoothly, but when directors have the right expectations, boards can effectively plan for the future.m
Dan Marcec is Editor-in-Chief of C-Suite and the Director of Content at Equilar. He can be reached at firstname.lastname@example.org.