In response to questions and comments, William Farrell has added to his Board Governance blog series. This time he looks at the value of term limits for NEDs and offers ideas on how to run effective board meetings.
Just about a month ago I published my 3rd article in a series of 3 discussing the basics of good corporate governance. The intended audience was those new to board work or those with no exposure to working with or on boards, yet were interested in learning more. Over the 3 articles, I introduced the primary function of boards, their role in providing resilient leadership in times of crisis, the role of the Directors as well as the leadership positions on Boards. I wrapped it up with an overview of one of the essential relationships: the Board and the CEO. If there was one point I was trying to make, it was the Board advises and the CEO manages. I very much appreciate the positive reception the articles received. However, I received enough comments and questions that it appeared that there are 2 remaining basic points that I ought to address before I can wrap this up.
I received questions and comments regarding the value of term limits for non-executive Board Directors and questions about how this ‘board stuff’ works in practice; or how are board meetings supposed to work? While these 2 issues are not directly related, I’ll address them here.
Running effective meetings is a very important matter. The Board really only exists when it convenes. Board meetings are the heart of the Board’s activities. The meetings drive the organization’s agenda and are the primary decision-making venue. The tone, structure, and efficiency of the meetings in large part determine the effectiveness of the Board. A quality Board requires quality meetings. When discussing effective board meetings, I always point to my Four Factors Driving Quality of Board Meetings:
The issue of whether or not non-Executive Directors ought to be subject to term limits is less open and shut and remains a point of discussion. One side of the argument is that Board Directors require time to become effective. Increased time on a particular board leads to a deeper understanding of the company and its challenges. A Director with many years on a company’s board should know about how a company has evolved and how it has managed problems in the past. He or she should know well what works and what does not work. The point being the longer a Director serves on the Board the more likely that Director is going to provide valuable guidance to the CEO and management team, ultimately increasing shareholders' value. Requiring term limits forces Boards to remove valuable and effective Directors.
The other side of the argument is that term limits address some common problems with some boards. Term limits vary, but normally they run from 9 to 12. Limiting the length of time a person can serve on a Board forces turnover. This can prevent Boards from getting stale in their approach to problems. In times of accelerating change, the demand for certain skills sets on a Board changes very quickly. Think digital communication, the role of AI, globalization, decoupling, etc. Without required turnover, a Board could lack important skills for quite some time. Diversity and inclusion are common themes today. It is well known that more diverse boards tend to be more effective. But without term limits, developing a more diverse and inclusive Board can take a very long time. Another issue that term limits help address is perceived coziness between Board Directors and management. Since one of the functions of the Board is to monitor and evaluate the performance of the CEO, there may be a risk that Board Directors that spend a long time on a Board may lose some objectivity and identify too closely with CEO performance or some programs initiated by the Board but executed by the CEO. With NGOs and purely volunteer boards, long-term Directors may develop significant influence over the Board or the CEO. This situation can lead to violating the fundamental principle the Board advises and the CEO manages.
The jury is still out on this matter and accepted practice seems to go back and forth on this matter. My view is that when properly executed, term limits lead to healthier and more effective boards.
To address the concerns of having the right combination of skills amongst the Directors and to ensure that the Directors remain objective and engage appropriately, the role of the Nominations Committee must be raised. The Nominations Committee ought to on an annual basis develop and review the skill and experience set the company needs to be successful. The committee compares this to the exiting board and then determines what, if anything, is needed to augment the Board. At the same time, the committee evaluated the level of diversity on the board and goes through a similar process. In addition to this, it is best practice for the Nominations Committee to establish and run an assessment of the Board’s behavior and performance. Boards can do this themselves or with the assistance of an outside consultant.
A final word on term limits. Setting a term limit does not necessarily mean that once a Director meets the limit, say by serving 9 years or 3 3-year terms. Some rules allow that Director to return after stepping down for 1 full term, in this case, 3 years. This can break the cycle of complacency and allow the return of seasoned, and now refreshed Directors.
So that’s it for now. I appreciate your attention and feedback. Please continue to reach out with any questions or comments.