April 2, 2024
Dear Friends of Trewstar:
Why is it so hard to part ways with directors?
Much has changed since we started Trewstar twelve years ago. One thing has not changed: resistance to asking certain directors to leave a board. An accomplished director told us just last week there is no way she is bringing up “refreshing” ineffective board colleagues. “You know how it is,” she said. Sadly, we do.
Despite gallons of ink spilled on the topic, board refreshment is still among the most intractable issues in US corporate governance. For every situation, there is an exception. For every opinion, someone disagrees. For every suggested solution, there is a reason not to move forward.
We asked ourselves if we had anything new to say on the topic of board refreshment. (We make a point of only writing to you when we do.) We hope you find these five suggestions both new and useful to your board deliberations.
1. Institute 10-year term limits for new directors. It will help current directors stop believing their board seat is akin to a Supreme Court appointment. Granted, this creates a two-tier system for a number of years, which isn't ideal for the first new directors. But it might normalize the adoption of term limits in the US and allows plenty of time for a new director to learn and contribute.
2. Make it mandatory to withhold a portion of directors’ cash and/or equity compensation. A farewell payout when directors leave a board makes departing more desirable for all directors and cushions the blow for those not being renominated. We hear some institutional shareholders really like this hold-till-retirement feature.
3. Ask directors who are not renominated to resign promptly. This avoids the awkwardness of a lame duck situation for all concerned. There is nothing sacred or legally required about completing a term. Concerns about the appearance of multiple 8K filings should not overshadow the upside of adding highly qualified new directors. This is less of an issue for boards that elect all directors annually. However classified boards are doing a disservice to shareholders by waiting out the three-year terms of non-contributing directors.
4. Offer a Director Emeritus title for retired directors. Invite retired directors to join for dinner at one board meeting a year. This is a nice way to stay close to directors you wish hadn’t retired. As a Director Emeritus, long-tenured directors who are still contributing (particularly retired CEOs) might make themselves available throughout the year should the CEO want their advice. Sitting CEOs often tell us those are the ones they call for input between board meetings.
5. Expand the size of the board in the short term. Yes, this has been mentioned many times before. We bring it up again because it is such a simple way to bring in fresh talent as part of an orderly succession process. Don’t let governance procedural necessities make it seem complicated. We work with several clients who are good models for this. They adhere to their retirement age limits (rather than push them higher), adding new board members to backfill the skills they will lose. The new board members serve alongside the veteran directors for a year before they retire.
Finally, this is not a suggestion, but a hope: We owe the progress on diversity in boardrooms to the power of institutional investors demanding change. March 7, 2017, is the day that State Street Global Advisors said it would vote against chairs of nominating and governance committees who failed to take action to increase the number of women on their boards. Others followed suit, expanding calls to include racial diversity on boards. By all accounts, change is underway that had previously been elusive. Hopefully, institutional investors will insist on all manner of ways to increase board refreshment – the tried and true, which might work if enacted (i.e. individual director evaluations) and some of the new ideas mentioned here.
We hope this kicks off a lively conversation. Please share your ideas on this tricky topic!
Best Regards,
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