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Companies are Moving Away from Mandatory Director Retirement Policies and Pursuing Other Ways to Achieve Board Refreshment

NEW YORKAug. 8, 2022 /PRNewswire/ — As companies are seeking to refresh the composition of their boards, they are moving away from policies that mandate turnover of their directors based on age or tenure. They are instead pursuing other avenues that provide for a tailored approach to opening up board seats for directors who will bring fresh perspectives, skills, experiences, and diversity to the board room.

The Conference Board report, using data provided by ESGAUGE, reveals that, in the S&P 500 the percentage of companies with mandatory retirement policies based on age dropped from 70 percent in 2018 to 67 percent as of July 2022. The policies also dropped in the Russell 3000, from 40 percent to 36 percent. Moreover, mandatory retirement policies based on tenure remain unchanged and uncommon, used by just six percent of the S&P 500 and four percent of the Russell 3000.

While mandatory turnover policies have been on the decline, the analysis reveals that substantially more companies are now conducting comprehensive board evaluations—a combination of board, committee, and individual director assessments. In the S&P 500, the share of firms that evaluate all three areas rose from 37 percent in 2018 to 52 percent in 2022, and from 18 percent to 34 percent in the Russell 3000.

This has been accompanied by a marked rise in the share of companies using an independent facilitator to conduct board evaluations. While most companies still do not disclose using an independent facilitator, from 2018 to 2022 the share that have done so has more than doubled in both indices. These in-depth and independent evaluations can open fruitful discussions about many challenging topics, such as identifying areas where the current board’s composition does not meet the needs of the board and the company, and thereby facilitate appropriate board turnover.

There has also been an increase in the percentage of companies with overboarding policies that limit the number of other public company boards on which a director can serve. The share of S&P 500 firms with an overboarding policy grew from 64 percent in 2018 to 72 percent in 2022, and in the Russell 3000, from 45 percent in 2018 to 50 percent in 2022. These policies trigger discussions with directors about those boards on which they may no longer serve.

Even with the steps companies are taking to refresh their boards, the share of newly elected directors at larger companies remains relatively unchanged: Since 2018, the percentage of newly elected directors in the S&P 500 has held steady at nine percent. This equates to approximately one new director joining an S&P 500 company board each year, which have an average of 11 directors. The appropriate level of turnover at each company will vary, reflecting a balance between adjusting the mix of skills and backgrounds on the board to serve the company’s strategic priorities, while also maintaining board cohesion and successfully onboarding each new director.

The report includes insights and data—as recent as July 2022—relating to board refreshment policies and director evaluations at S&P 500 and Russell 3000 companies. It is the final installment in a three-part series, with the first report examining board composition and the second report examining board leadership, meetings, and committees.

Findings and insights from this new report include:

Election of New Directors

Unchanged: the rate at which new directors are elected at larger companies

  • Stable in the S&P 500: The share of newly elected directors has held steady at nine percent since 2018.
  • A slight increase in the Russell 3000: The share ticked up from nine percent in 2018 to 11 percent in 2022.

“Boards can use several mechanisms to promote board refreshment, including policies that require board turnover and trigger a discussion of turnover. Most importantly—and what doesn’t get emphasized enough—boards can promote a culture of board refreshment, in which there is no stigma associated with rotating off a board member before one is officially required to leave,” said Merel Spierings, author of the report and Researcher at The Conference Board.

“Creating a culture in which it’s fully acceptable for directors to rotate off a board before they are required to do so can be accomplished not only by establishing guidelines on average board tenure. Firms can also achieve this through setting initial expectations for director tenure through the director recruitment and onboarding process, as well as candid discussions about how the current mix of directors matches the company’s needs during the annual board evaluation and director nomination processes,” said Paul Washington, Executive Director of The Conference Board ESG Center.

Mandatory Retirement Based on Age

In decline: mandatory retirement policies based on age

  • A decline in the S&P 500: The share with such a policy decreased from 70 percent in 2018 to 67 percent in 2022.
  • An even bigger decline in the Russell 3000: The share decreased from 40 percent in 2018 to 36 percent in 2022.

“Another sign that age-based director retirement policies are losing ground is that companies that have such policies are increasingly building in some flexibility. Indeed, the percentage of firms whose policy permits no exceptions whatsoever saw notable drops in both indices: In the S&P 500, the share decreased from 41 percent in 2018 to 34 percent as of July 2022, and from 24 percent to 18 percent in the Russell 3000,” noted Paul Rodel, Partner at Debevoise & Plimpton LLP.

Mandatory Retirement Based on Tenure

Unchanged and uncommon: mandatory retirement policies based on tenure

  • Little movement in the S&P 500 and Russell 3000: The share with such a policy remained virtually unchanged in the S&P 500, from five percent in 2018 to six percent in 2022. The share also remained virtually unchanged in the Russell 3000, from three percent in 2018 to four percent in 2022.

The largest companies are most likely to adopt director term limits; the smallest firms are least likely

  • The largest companies—$50 billion and over in annual revenues: As of July 2022, 12 percent have a policy that sets a maximum tenure based on years of service.
  • The smallest companies—under $100 million in annual revenues: Just one percent of these companies have such a policy.

“Tenure-based retirement polices continue to be rare in the US. Many boards prefer to retain the flexibility to have directors with a mix of tenures. Additionally, these policies can force the departure of long-serving directors who are strong contributors to board deliberations. For example, directors whose service predates that of the CEO may have particularly useful institutional memory and may be more willing to challenge management,” said Annalisa Barrett, senior advisor with the KPMG Board Leadership Center.

Board Evaluations

Growing in popularity: companies that conduct comprehensive, three-part performance evaluations of the full board, committees, and individual directors

  • A substantial increase in the S&P 500: The share reporting that they conduct full board, committee, and individual director evaluations has now become the most common practice, rising from 37 percent in 2018 to 52 percent in 2022.
  • The approach nearly doubles in the Russell 3000: The share taking this approach soared from 18 percent in 2018 to 34 percent in 2022.
    • The most common practice continues to be only full board and committee (without individual director) assessments.

To conduct board assessments, companies are increasingly using independent facilitators

  • The approach more than doubles in the S&P 500: The share disclosing their use of an independent facilitator for board assessments increased from 14 percent in 2018 to 29 percent in 2022.
  • The approach more than doubles in the Russell 3000: While the share taking this approach remains minimal, it increased from six percent in 2018 to 15 percent in 2022. Given that many companies only use an outside facilitator every two or three years, this could signal a major shift.

“Individual director evaluations and the use of independent facilitators allow companies to have open conversations about sometimes challenging subjects that are often ignored by check-the-box based assessments. More importantly, these practices—which the latest data show are gaining popularity—can help boards not just talk about difficult issues, but resolve them, leading to more effective and enjoyable board service,” said Rich Fields, Head of the Board Effectiveness Practice at Russell Reynolds Associates.

Director Overboarding

A rise in restrictions: companies are increasingly limiting the number of other public company directorships their board members can accept

  • An increase in the S&P 500: The share with an overboarding policy applicable to all directors grew from 64 percent in 2018 to 72 percent in 2022.
  • An increase in the Russell 3000: The share grew from 45 percent in 2018 to 50 percent in 2022.

“Director overboarding policies are a relatively even-handed way of ensuring that directors are not overcommitted in this era of increasing workload. They also can prompt a thoughtful discussion between directors and the companies on whose boards they serve as to whether the director is over-committed and should consider stepping down from a particular board,” said Justin P. Klein, Director of the John L. Weinberg Center for Corporate Governance.

“Regardless of their approach to board refreshment, companies should expect continued investor scrutiny in this area,” said Umesh Chandra Tiwari, Executive Director of ESGAUGE. “Indeed, while institutional investors may defer to the board on whether to adopt mandatory retirement policies, many are keeping a close eye on average board tenure and the balance of tenures among the directors serving on the board.”

The project is led by The Conference Board in collaboration with data analytics firm ESGAUGE, along with Debevoise & Plimpton, the KPMG Board Leadership Center, Russell Reynolds Associates, and the John L. Weinberg Center for Corporate Governance.

About The Conference Board ESG Center
The Conference Board ESG Center serves as a resource, platform, and partner to help Member companies address their priorities in corporate governance, sustainability, and citizenship. www.conferenceboard.org/esg

About The Conference Board
The Conference Board is the member-driven think tank that delivers trusted insights for what’s ahead. Founded in 1916, we are a non-partisan, not-for-profit entity holding 501 (c) (3) tax-exempt status in the United States. www.conferenceboard.org

About ESGAUGE
ESGAUGE is a data mining and analytics firm uniquely designed for the corporate practitioner and the professional service firm seeking customized information on U.S. public companies. It focuses on disclosure of environmental, social, and governance (ESG) practices such as executive and director compensation, board practices, CEO and NEO profiles, proxy voting and shareholder activism, and CSR/sustainability disclosure. Our clients include business corporations, asset management firms, compensation consultants, law firms, accounting and audit firms, and investment companies. We also partner on research projects with think tanks, academic institutions, and the media.

About Russell Reynolds Associates
Russell Reynolds Associates is a global leadership advisory firm. Our 520+ consultants in 47 offices work with public, private and nonprofit organizations across all industries and regions. We help our clients build teams of transformational leaders who can meet today’s challenges and anticipate the digital, economic and political trends that are reshaping the global business environment. From helping boards with their structure, culture and effectiveness to identifying, assessing and defining the best leadership for organizations, our teams bring their decades of expertise to help clients address their most complex leadership issues. We exist to improve the way the world is led. www.russellreynolds.com

About the John L. Weinberg Center for Corporate Governance
The John L. Weinberg Center for Corporate Governance was established in 2000 at the University of Delaware and is part of the Lerner College of Business and Economics. It is one of the longest-standing corporate governance centers in academia, and the first and only corporate governance center in the State of Delaware, the legal home for a majority of the nation’s public corporations. The Center is recognized as a thought leader in the corporate governance field. www.weinberg.udel.edu

About Debevoise & Plimpton
Debevoise & Plimpton LLP is a premier law firm with market-leading practices, a global perspective and strong New York roots. We deliver effective solutions to our clients’ most important legal challenges, applying clear commercial judgment and a distinctively collaborative approach.

About the KPMG BLC
The KPMG Board Leadership Center (BLC) champions outstanding corporate governance to drive long-term value and enhance stakeholder confidence. Through an array of insights, perspectives, and programs, the BLC—which includes the KPMG Audit Committee Institute and close collaboration with other leading director organizations— promotes continuous education and improvement of public and private company governance. BLC engages with directors and business leaders on the critical issues driving board agendas—from strategy, risk, talent, and ESG to data governance, audit quality, proxy trends, and more. Learn more at www.kpmg.com/us/blc

SOURCE The Conference Board