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Keeping The Board Refreshed And Independent

Merrill Disclosure Solutions | October 28, 2015


Abstracted from: Is 75 The New 68? Director Tenure, Mandatory Director Retirement And Related Issues By: William Libit and Todd Freier Chapman and Cutler, Chicago IL I Corporate & Securities Law Advisor, Vol. 29, No. 3, Pgs. 2-11

Governance continues to focus on independence. In the United States, 74% of institutional investors consider director tenure important in maintaining an independent and flexible board. Yet few agree on how to achieve reasonable turnover and diversity, attorneys William Libit and Todd Freier observe. In practice, many companies have extended the mandatory retirement age, thus making it easier for long-term directors to remain in place. While companies have pushed back the retirement age to benefit from the wisdom of experienced directors, very few try to assure board independence by limiting the length of time - whether number of years or number of terms - that any given director can serve. Only 3% of the S&P 500 companies currently have term limits for directors, and these range from 10 to 30 years. Of the remainder, about two-thirds explicitly disavow term limits, and one-third do not address the topic at all. Over three-quarters of directors report that term limits have not come to the attention of the boards on which they serve.

No inflexible term limits. American institutional investors are concerned with directors' tenure but shun arbitrary limits, the authors indicate. Surveys of asset managers, public pension funds, and proxy advisory firms reveal that institutional investors explicitly consider board tenure in their investment decisions and in their voting for particular directors. The investors believe that long tenure can compromise directors' effectiveness and independence, but they also want to avoid imposing inflexible limits that could remove the best directors at some companies. If boards adopt term limits and then waive them for particular directors, the policies themselves become a fiction unless there are clear policies on the waivers as well. While both companies and investors in the United States shy away from outright limits on terms, the issue of board refreshment and independence needs to be addressed directly as part of good governance.

How overseas regulators view term limits. The positions of other countries on directors' term limits, the authors suspect, may indicate the regulatory direction for the future in the United States. The European Commission recommends a 12-year limit for directors. The UK Corporate Governance Code sets the limit at nine years, but it allows directors to remain on a year-by-year basis if they survive special annual elections. The Hong Kong Exchange recommends a nine-year limit but allows longer tenure if the director wins a special, separate vote for the long-term director's continued service as a director. Canada requires disclosure of a company's policy on term limits. Canadian companies that do not limit terms or do not have other board refreshment policies in place must disclose why they have ignored the issue. Directors' tenure in both the United States (S&P 500) and Canada (S&P/TSX Composite Index) is longer than in the European Union: both have average tenure of 8.6 years. Public-company directors in the United Kingdom (FTSE 350) have an average tenure of 4.8 years; in Germany, 5.0 years; and in France, 7.4 years.

US activists promote a focus on director tenure. Although mandated limits are not in America's near future, increasing concern from both regulators and investors can be anticipated. Some activist/shareholders plan to target companies with entrenched boards where two-thirds of directors have served for 10 years or more. This sort of activity is on the increase, so boards should be prepared for greater scrutiny and agitation related to board entrenchment and refreshment, the authors warn. Before the company becomes a target, the board should discuss these issues and have clear policies in place that address them, covering board independence, refreshment, and tenure.

Abstracted from Insights: Corporate & Securities Law Advisor, published by Wolters Kluwer Law & Business, 4025 W. Peterson Avenue, Chicago IL 60646. To subscribe, call (800) 638-8437; or visit

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