King IV, Principle 12 states that “the governing body should establish arrangements for periodic, staggered rotation of its members so as to invigorate its capabilities by introducing members with new expertise and perspectives while retaining valuable knowledge, skills and experience and maintaining continuity.”
This principle creates an interesting conundrum but provides businesses with an opportunity to creatively go about ensuring a refreshed, diverse and vitalized Board. Striking a balance in the Boardroom between director independence, in-depth knowledge of the Company and the wealth of experience of directors serving on its Board, is becoming an increasingly topical issue.
Research shows that institutional investors are beginning to use board tenure as a proxy for board independence and effectiveness. “Group thinking” over time forms an environment where even the most committed director is likely to become less capable to ask challenging questions and contribute inventively to the ever-changing conversations of corporate issues.
The acceptable rule of thumb on periodic staggered rotation is a term of three years, renewable for a further two terms. A study shows that on average, directors add value until their eighth year. Longer tenure tends to be associated with reduced positive impact on the Company’s value.
Good Corporate Governance and an effective Board of Directors attracts investors and ensures investment. Director independence is critical to ensure that the Board fulfils its role objectively and holds the Management accountable to the Company.
A star cast is a well-balanced, diverse cast equipped with passion, experience, knowledge, independence and objectivity.
It is therefore of cardinal importance that Boards take steps to ensure that they constantly revive themselves with new skills, new blood, and refreshed eyes that are willing to ask the outsider’s questions.
Thank you for this article. Quite interesting to see the stats on tenure maxed at 8 years before seeing a decline in value add. I wonder if this would be true for employees as well? I would guess so.
Another recent term I discovered is one of golden jackets or golden skirts, where NED’s are serving several boards (unrelated entities) simultaneously. Do you have any thoughts on this practice, especially in terms of skill transfer and the Directors’ ability to act truly independently?