Governance Explainer – Board tenure
How long should a director serve on a board?
In March 2023, two non-executive directors at Liontrust, the FTSE 250 fund group, quit over a row about the Chair’s 12-year tenure on the board. Alastair Barbour took on the role of Chair of Liontrust in 2019, but had been on the board since April 2011, taking his tenure to 12 years. The departing NEDs felt that this was too long.
According to Spencer Stuart, the average tenure of non-executive directors (including chairs) at FTSE companies is 4.3 years. However, a small proportion of NEDs (4%) and chairs (8%) have served for longer than 9 years.
Where should the line be drawn?
According to the UK Corporate Governance Code, the recommended tenure limit for the chair is 9 years. There is no recommended tenure for non-executive directors – but after 9 years they are no longer considered independent. In many instances, this acts as a ‘de facto’ ceiling on tenure.
However, the Code’s recommendations are not mandatory and only apply to premium-listed companies – although they are an influential benchmark across much of UK plc. Companies are asked to apply its provisions on a ‘comply or explain’ basis. This allows boards some room to extend the tenure limit beyond 9 years, supported by comprehensive explanations to investors and other stakeholders.
What are the advantages of limiting the tenure of board members to 9 years or less?
Directors who serve for an excessive period of time leave themselves open to accusations, from investors and other stakeholders, of losing their independence and becoming too close to company management.
Tenure limits can be a great tool for companies to appoint younger directors, with fresh perspectives and from diverse backgrounds, who bring a different approach. It can also be useful for getting rid of those who have outlived their usefulness or don’t contribute much.
A regular dose of fresh blood on the board helps prevent the concentration of power within a cosy club. New perspectives and a healthy exchange of views is a key aspect of an effectively functioning board.
Are there disadvantages associated with too much boardroom turnover?
Certain circumstances may favour a higher level of continuity and stability.
For example, a company may be in the middle of a corporate transaction. It may need stability during a period of market flux (like the Coronavirus pandemic). And too much turnover may rob the board of valuable experience, skills and corporate ‘memory’.
Identifying and recruiting the right candidates for board roles is not an easy task and may take some time. When they’ve been appointed, the Chair or CEO may have to invest significant time to ensure that new directors properly understand the issues. According to some, directors are not fully effective until they have spent at least a couple of years in the job.
Ultimately, there are no hard and fast rules. But whatever the board decides, the key requirement is that continued service on a board must be adequately justified and explained.