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UK leads way on non-executive director term limits

26 June 2014

How long should you stay in a job? I am often asked that question by people who worry that leaving too early would look uncommitted, and staying too long may make them unattractive to anther employer. But there is one group of people who know exactly how long they should stay in their jobs, and that is the non-executive directors of the UK’s public companies.

When the late Derek Higgs published his report into the role and effectiveness of non-executive directors in 2003 he suggested that NEDs should serve for two terms of three years, and that anything beyond three terms of three years would render them no longer independent. The clear implication was that if you have served on a company board for nine years or more, you will have ‘gone native’. This is now enshrined in the principles of corporate governance in the UK, and the combined code makes it a requirement that if you have a director who has served for more than nine years then you have to explain, in writing, why you deem them still to be independent.

Which is why very few plc directors serve more than nine years these days. Indeed, the average tenure of a board director (both executive and non-executive) in the UK according to Spencer Stuarts latest Board Index, is 4.3 years. This contrasts strongly with the US, where the average tenure is twice that.

Lots of things about US public company governance [and Australian] contrasts strongly with the UK, but none more than term limits.

Another thing that contrasts sharply is how many women there are on public company boards. Last week saw the launch of the 30% Club in the US, at a meeting to share the progress we have made in the UK in getting more women into boards and explore what elements could be adopted in the US. Helena Morrissey, Valerie Jarrett, Sally Crawcheck and others, including me, spoke during the session, which was hosted by Peter Grauer, Bloomberg’s chairman and the founder chairman of the 30% Club in the US. (Mr Grauer is also a non-executive of the UK’s only female-free FTSE100 board, so I confidently expect an appointment there any day!)

But there are much bigger differences. The first is that of term limits. Only 16 companies in the S&P 500 have term limits for their directors. And even then, one of those sets the limit at 30 years. [In Australia directors and NEDs have no set limits unless the company’s constitution sets limits.] In the UK companies are required to regularly refresh their boards, which opens opportunities for many to serve.

The US has enacted legislation on company governance, in the form of Sarbanes Oxley, but this is focused on accounting oversight, not board composition. I as regular readers know, am resolutely opposed to legislation setting quotas for women on boards, and indeed not mad keen on more company legislation altogether. Comply or explain, the UK way of doing things, is infinitely preferable. This has meant that, also without heavy legislation, the split of chairman and chief executives in the UK is adopted by the vast proportion of companies. And here is another major difference with the US; 55% of US companies have a combined CEO/chair, and only 25% have a truly independent chair, a non-executive or a former executive director who over time has met the NYSE or NASDAQ independence standards. And then there are the age limits – in the US boards are raising mandatory retirement ages to allow directors to serve longer. [In Australia legislation recently passed, removed age limits for board members.]

I would challenge shareholders to look seriously at the lack of term limits in the US. If you want wider representation on boards, of any kind – female, minority, you name it – then it helps if boards regularly refresh their composition. And I would argue that it is a better safeguard for shareholders, too, than masses of legislation. It helps everyone to know how long you should stay in a job.

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