Written by Joseph F.X. Zahra, 9 July 2013
Some statistics from the United States of America – courtesy of Bloomberg Business Week: 64 per cent of directors on the Standard & Poor’s 500-stock index have served ten to fifteen years on a board of directors. Five per cent have served over fifteen years. Berkshire Hathaway’s board of thirteen members includes five directors who have been on the board for over fifteen years. The chairman Warren Buffett is eighty two years old, and he has been chairman for forty three years, and his vice- chairman is eighty nine years old, and has been on the board as a director for thirty five years. Coca Cola’s board has two directors aged over eighty, who when adding up their board years together they come up to fifty five years.
There is probably a natural reaction to being moved out of a board of directors. On a psychological level, a person feels comfortable within the status quo... and is used to the regular remuneration. The arguments in favour of long directorship tenure are those of continuity and knowledge and understanding of the company. There is value in putting situations in a historical perspective. The understanding of the company and from where it came from is definitely a positive criterion.
However, you have the flip-side to all this – the aversion to change. Statements like: “been there, done that”, “why change once it has worked for so many years”... arguments against changing models, strategies, processes and procedures, can be a big peril for the business. This leads to stagnation... followed by decline.
Business out there is changing. This moving picture includes globalisation and its impact on operations, marketing, HR. It includes the development of internet technology, social media, and digitisation... changing political risk profile in a number of countries. Add to this - changing logistic technology, concepts of warehousing and stock-piling, regulatory reporting obligations, compliance issues... the list is never-ending, and these are the new challenges being faced by the senior executive teams of companies. But do board directors understand the implications of these changes on the business?
Shareholders need to ensure that the directors they nominate on the board are kept updated with these external and internal environmental changes. That the directors are experienced, skilled and competent in the “new technologies” – be these in information technology, social media, financial reporting requirements etc and that there is a balance on the board of competences in different disciplines.
The longer a director serves the bigger is the possibility that they lose touch with the changing environment. This could make it more difficult for them to understand why strategies need to be changed and business models modified.
Establishing a succession planning policy for board directors is one way how to tackle the risks of directors who don’t want to go away. This can take different forms including a policy of rotation of a section of the board of directors, a limit on the number of years that a board director can serve on the same board, a profile of director candidates’ competence and experience to ensure balance in disciplines and professions on the board. It is worth the while to have shareholders thinking about this early.