Boards have been grappling quietly for years with two competing desires: for new directors who will bring vital perspectives, and for the need to retain board veterans who preserve institutional knowledge. The tension between these opposing agendas appears to be coming to a head.
Turnover on American boards is at a low. The Korn/Ferry Market Cap 100, our firm’s annual report on governance trends at the largest public companies, reported that only 7.6 percent of board seats changed hands in fiscal year 2010. Concurrent studies tracking the S&P 500 found that the number of new independent director appointments was down 25 percent compared to just five years earlier.
There are multiple forces at work here. One is that boards don’t want to expand and get unwieldy; in fact, some are contracting. Second, directors aren’t retiring as quickly as expected. Among the KFMC100 companies—the 100 largest by market capitalization traded on the NYSE or Nasdaq—about 20 percent of boards granted exceptions to directors who’d surpassed a stated retirement age. More than 30 percent of all directors had been in their seat more than a decade.
Hanging on to experienced directors makes a great deal of sense. They’ve acquired a valuable depth of knowledge about the company, and a well-acquainted board is likely to be more effective and efficient. Doors also narrowed to newcomers once the financial crisis started in 2008; many boards clearly thought it was a bad time to risk disrupting the work or culture of their group. Today, even if business conditions are improving, directors might hold tight to the knowledge and trust formed in that crucible. After all, they’ve been through a lot together.
The problem? Such practices aren’t creating the space to recruit the expertise that boards appear to be clamoring for, such as experience in international markets. One in five directors newly appointed to the 100 largest boards in FY10 were not American; that’s twice the rate of international origins found among the incumbent directors. In addition, 23 percent of all new appointments in that group came from careers in the public sector because boards want more perspective on the regulatory and legislative processes.
Clearly boards are trying to alter their makeup, increasing every form of diversity, but they have to balance that against the benefits of stability. Further complicating matters is that the diversity of talent these boards do seek is not prevalent. Two-thirds of all FY10 appointments to the KFMC100 were or had been CEOs. Ford Motor Company just appointed Jon Huntsman Jr.— a former governor of Utah, U.S. ambassador to China and CEO of Huntsman Corp., a global chemical company. You can’t pick up that breadth on any street corner, or even any corner office. Plain and simple, the pursuit of directors is an escalating talent war.
Boards can do more to open up opportunities. We know that fewer than half of the public boards conduct performance evaluations for individual directors. When a board is concerned about the performance of only one or two of its members, that tends to be viewed as an opportunity cost, but not a severe distraction, so corrective action doesn’t make the priority list. The opportunity cost rises, however, when it cramps the chances to attract needed diverse perspectives.
Tenure is another consideration boards could think critically about. There are certainly widely held views about the diminishing returns of long tenure in positions of leadership. And one-third of all directors in the KFMC100 group have served 10 years or longer. Would boards improve if more directors rotated to new venues after term limits, allowing talents and diversity to rebalance with fresh perspectives?
It’s going to take innovative thinking to handle these competing priorities—diversity, continuity, freshness—amid a limited talent pool.
Steve Mader is the vice chairman and managing director of Board Services at Korn/Ferry International. He can be reached at email@example.com.