Board Refreshment and Director Succession in Investee Companies

The following post comes to us from Rakhi Kumar, Head of Corporate Governance at State Street Global Advisors, and is based on an SSgA publication; the complete publication, including appendix, is available here.

State Street Global Advisors (“SSgA”) believes that board refreshment and planning for director succession are key functions of the board. Some markets such as the UK, have adopted best practices on a comply-or-explain basis that aim to limit a director’s tenure to nine years of board service, beyond which, investors may question a director’s independence from management. Such best practices have helped lower average board tenure, and have encouraged boards to focus on refreshment of director skills and plan for director succession in an orderly manner.

Based on SSgA’s analysis of 2013 data, the average board tenure across 1,300 UK listed companies was approximately 6.4 years. In comparison, the average board tenure across 5,600 US listed company board was 8.6 years. As a result, only 6% of UK companies, compared to 20% of US companies, had directors with tenure of 12 years or more. A comparison of average board tenure across countries in Western Europe revealed that Spain (7.7 years) and France (7.4 years) had the longest average tenured boards while German boards (5 years) had the shortest average tenure in the region. The European Commission has recommended a 12 year director tenure as a best practice for EU based companies. We anticipate that average board tenure in EU companies will fall over the coming years. An analysis of average board tenure by market is provided in Figure 1.

SSgA’s Policy on Director Tenure

Given the broad range of average tenure in different regions, in 2014, SSgA is evaluating board refreshment and director succession practices at its investee companies through a new director tenure policy. SSgA’s policy is designed to identify companies with a preponderance of long-tenured directors, which may indicate a lack of refreshment of skills and perspectives on the board. It may also limit a board’s ability to bring on new directors with relevant expertise without increasing the board size. In addition, SSgA believes that long tenure may also diminish a director’s independence.

Our policy supports the presence of long-tenured directors in roles appropriate to their status. We do not consider long-tenured directors as ineffective to serve on a board though we discourage their presence on key board committees where independence is considered paramount. The policy is also designed to encourage boards with predominately long-tenured directors to better address director succession planning.

SSgA’s director tenure policy in the US and UK is multi-layered and takes into consideration the average market-level board tenure. Companies are screened on three criteria—average board tenure, preponderance of very long-tenured non-executive directors and classified board structures. Companies are considered to have excessive average board tenures if they exceed one standard deviation above the average market-level board tenure. Directors are considered to have long-tenures if their tenure is in excess of two standard deviations above the average market-level board tenure. Initially, companies are screened on their average board tenure. Companies with long-average board tenures are then further screened for a preponderance of non-executive directors that have long-tenures; and classified board structures [1] (see Figure 2)

Figure 1: Analysis of Average Tenure by Country

Country Number of Profiled Companies Average Director Tenure % of Companies with Average Tenure Above 9 years % of Companies with Average Tenure Above 12 years % of Companies with Average Tenure Above 15 years
USA 5,641 8.6 39.4 19.7 8.3
United Kingdom 1,304 6.4 18.3 6.1 2.4
France 249 7.4 29.3 13.3 5.2
Germany 162 5.0 6.8 1.9 0.0
Sweden 139 6.0 15.1 4.3 0.7
Switzerland 129 6.7 17.1 7.0 3.1
Italy 96 5.6 11.5 5.2 3.1
Netherlands 90 5.2 4.4 2.2 1.1
Spain 87 7.7 28.7 9.2 3.4
Norway 72 5.1 9.7 5.6 4.2
Finland 64 5.6 9.4 4.7 3.1
Belgium 54 7.0 24.1 11.1 0.0
Denmark 51 6.2 21.6 5.9 2.0
Luxembourg 29 5.7 13.8 6.9 3.4
Austria 26 6.6 15.4 7.7 0.0
Portugal 20 5.8 15.0 10.0 5.0

Source: ISS Proxy Advisory Services

Figure 2: SSgA’s Director Tenure Screen for US and UK Markets

Screen One Is the average board tenure above one standard
deviation from the average market tenure?
Screen Two Do one-third of non-executive directors have tenures
in excess of two standard deviations from the
average market tenure?
Screen Three Is the board classified?

SSgA’s tenure policy for companies domiciled in Western European markets classifies directors as non-independent based on the recommendations of the European Commission.

Through its Policy SSgA Expects

  • i) The chairman of the nominations/governance committee to periodically review the skills and expertise on the board in the context of the company’s long-term strategy and to plan for an orderly director retirement/succession process.
  • ii) Long-tenured directors to refrain from serving on the audit, compensation and nomination/governance committees.
  • iii) Companies to declassify their boards and adopt an annual election cycle.

SSgA has provided guidance questions for directors reviewing board refreshment and director succession practices on company boards in Appendix A.

Actions Taken by SSgA Based on This Policy May Include

Proactively engaging with the chairman of the nominating committee to outline our expectations with respect to tenure and succession and encourage a more progressive approach to board refreshment. SSgA will encourage boards to consider diversity where this will strengthen the board’s ability to lead and oversee the company.

The policy may also translate into the following potential voting decisions:

  • Voting against ONLY the chairperson of the nominating/governance committee for failing to adequately address board refreshment and director succession at the company;
  • Voting against ONLY those long-tenured directors that serve on key committees; OR
  • Voting against members of the nominating/governance committee AND long-tenured directors serving on classified boards


[1] Companies that have a classified board structure are held to a higher standard as we believe a classified board structures may further limit the ability for board refreshment.
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