There are increasing conversations and more support from various governance organizations about term limits of generally about ten years for directors of publicly traded companies. The idea is to refresh boards and adjust for an organization’s changing needs and director skill sets. However, the downside of term limits is a lack of organizational knowledge, more time dedicated to recruiting and onboarding new board members, and the risk that new directors will not be effective. While term limits are worth examining carefully, as any step to improve corporate governance is, an equally important consideration is how boards can refresh and add needed competencies without imposing term limits?
Lack of continuity is often the biggest criticism of term limits. Experienced directors bring “institutional memory,” with years of experience with a company’s history, management, competitive position, mission, and values.
I believe that committed directors do not get stale over time but, instead, become more effective. Once a director understands a sector and company in detail and has gained real credibility with the management team and other directors, he or she is often more insightful on company-specific issues and more inclined to posit more out-of-the-box ideas.
The most effective way to determine whether directors are performing well is to have an effective, annual review process for individual directors, as virtually every company has for its management team. This assessment can include attendance, commitment, the relevance of skill sets, chemistry, and contributions to the board.
Regardless of whether an organization uses term limits, the problems they aim to fix highlight areas where boards can be improved. Boards need practices in place for continual development as well as protocols for backfilling vacated positions. As for term limits, my view is that they are a poor replacement for a detailed annual director review process.
Jonathan F. Foster
Founder & Managing Director — Current Capital Partners LLC
Originally published at: http://jonathanffoster.com/