Term Limits/Age Limits

Reasons For Limiting Tenure

Proponents of term limits and mandatory retirement ages for directors argue that they serve to bring fresh outlooks and new perspectives to boards by periodically forcing a board to replace directors. It is also argued that directors who serve on a board for many years may be less independent from management and, as a result, less of an advocate for shareholders. In addition, term limits and retirement ages for directors can provide boards with a way of getting nonperforming directors off of the board without having to ask for a director's resignation.

Leading corporate governance expert Charles Elson stated during an interview with Directorship , "I believe in mandatory retirement for everything in life, including law professors, unfortunately. Again, I think that you have to assume that there is a lot of talent out there in this country and you have to continue to bring in and rotate good talent. But I concede that it is true that there are many people of advanced years who make terrific directors. [1]

Negative Effects of Limiting Tenure

While the goals of term limits are laudable in principle, limiting the term a director may serve may not be an appropriate way to achieve these goals. Term limits are a somewhat arbitrary imposition on boards of directors and may force valuable, experienced directors to leave the board solely because of their length of service. Similarly, a mandatory retirement age sends the message that older directors cannot contribute to the oversight of the company. Although establishing a retirement age or limiting the number of times a director may be elected to the board provides a mechanical or “bloodless” means for addressing a real or potential performance issue with a director, it does not take into consideration the fact that a board member's effectiveness does not necessarily correlate with the length of his board service or his age. Time served is not a substitute for a thoughtful and rigorous board and director evaluation process, which is a better determinant of a director's fitness for service. According to ISS data, only 13.4 percent of 5,500 companies perform board performance reviews.

Companies do not embrace the concept of term limits. According to the American Society of Corporate Secretaries' Current Board Practices: Second Study survey, the concept of term limits for directors was rejected by almost 80 percent of its more than 600 respondents.[2] Russell Reynolds' 1997-1998 Board Practices Survey found that only 23 of the more than 1,100 companies surveyed had disclosed term limits for directors.[3] According to 2003 ISS data on 5,500 companies, only 0.8 percent impose term limits, ranging from eight to 20 years.

Mandatory retirement ages are more common. According to the 1999 Spencer Stuart Board Index (SSBI), the average age of outside directors at S&P 500 companies was between 60 and 64 for 51 percent of the companies and between 55 and 59 for 35 percent of the companies. However, the number of companies with a mandatory retirement age (generally ranging from 65 to 76 years) declined to 75 percent of SSBI companies in 1998, compared to 84 percent in 1992. [4] Russell Reynolds' 1997-1998 Board Practices Survey reported that 40 percent of companies with market capitalizations in excess of $1 billion had mandatory retirement policies for directors, with the retirement age usually set at 70 or 72.[5]

Boards also tend to support the concept of a retirement age for directors. A 2003 survey by Pearl Meyer & Partners of 84 directors at the 200 largest U.S. companies indicated that 75 percent were in favor of a mandated board retirement, and most recommended a retirement age of 70 to 75 years. [6] Nevertheless, ISS found that by 2003, only 11.9 percent of 5,500 companies had mandatory retirement ages, ranging from 60 to 80 years.