Improving the skill set and composition of corporate directors has become a priority for many companies now that environmental, social and governance issues have become of greater interest to investors. Having the right board members will also be critical as companies sort out new strategies to help navigate the expected economic slowdown. Finding ways to create board refreshment that strengthens boards so that they can meet current and future challenges requires more than setting retirement mandates.
According to data from a recent report from The Conference Board, corporate boards are reducing the use of mandatory age and board tenure retirement policies to generate board turnover. The percentage of S&P 500 companies with mandatory retirement policies based on age declined from 70% in 2018 to 67% in 2022. Among the Russell 3000, companies with mandatory retirement policies based on age declined from 40% in 2018 to 36% in 2022. An even smaller share of companies are using mandatory retirement policies based on board tenure according to the research. In the S&P 500, tenure-based board retirement policies were used by only 5% of companies in 2018 and 6% in 2022. In the Russell 3000, 3% of companies had tenure-based retirement policies in 2018 and 4% in 2022.
With responsibilities of boards increasing, the importance of board composition and skill set has increased as well. Here are a few things for boards to consider as they reshape their composition for the future:
• Instead of mandatory retirement policies, perform a mandatory review. Retiring a corporate director is always a sensitive matter, but it will inevitably come up. Perhaps mandating that each director’s contributions are reviewed after a reasonable time-period (perhaps every three or five years) would create an environment where board members could accept that they would be evaluated specifically for the purpose of board refreshment as part of their job. Criteria for the review and evaluation could be discussed and agreed upon by the board with the lowest performers agreeing not to stand for re-election.
• Instead of retiring board members, consider adding them too. While it may be counter-intuitive, adding a board member or two may be the best move to improve board composition and skill set. If a company has committed to better board diversity, the board can seek to add a diverse board member that also has a desired skill or relevant experience needed for company advancement. Directors with comprehensive knowledge of human capital management, climate change and cyber security—all areas investors are asking companies to produce reports on—may need to be recruited from the ranks of C-suite executives in key industries. Refreshment doesn’t have to mean taking positions away from the board.
• Maintain a healthy balance of older and younger board members. Age shouldn’t be the primary factor in board refreshment decisions—performance should be the main driver. Board members with longer tenure can provide important context to past strategic moves and provide leadership regarding how the company dealt with crisis situations that may reoccur. Such experience is valuable to the education and development of newer board members. Having a balance of board members who can teach and younger board members who want to learn would be optimum.
• Understand that for boards to be most effective, they must embrace change. Instead of promoting a culture that suggests joining a board is a “lifetime appointment,” emphasize assembling the best possible board to meet current and future challenges. Doing what’s in the best interest of the shareholders must be the priority.