Board tenure: A review

• Published date: 01 October 2020
• DOI: http://doi.org/10.1002/jcaf.22464
• Author: Md. Borhan Uddin Bhuiyan,Xuan Sean Sun
• Date: 01 October 2020

BLIND PEER REVIEW

Board tenure: A review

Xuan Sean Sun | Md. Borhan Uddin Bhuiyan

School of Accountancy, Massey

University, Auckland, New Zealand

Correspondence

Md Borhan Uddin Bhuiyan, School of

Accountancy, Massey University,

Auckland, New Zealand.

Email: m.b.u.bhuiyan@massey.ac.nz

Abstract

This article reviews the existing academic research on the determinants and

consequences of board tenure. Primarily, this article focuses specifically on

international empirical studies. We find that different corporate governance

characteristics determine board tenure. In addition, our review summarizes

the influence of board tenure on corporate outcomes, such as accounting per-

formance, financial reporting quality, and business strategy. This review con-

tributes to an understanding of the implications, benefits, and limitations of

board tenure. In the absence of any specific guidelines on current corporate

governance best practice codes in different jurisdictions, this article would ben-

efit regulators and professionals wishing to understand the importance and

consequences of board tenure. We also suggest future research needed to fill

the gaps in the existing board tenure literature.

KEYWORDS

board of directors, corporate governance, tenure

1|INTRODUCTION

The board of directors is an integral part of the internal

corporate governance system in modern operations, and

its effectiveness is central to the corporate decision-

making process (e.g., Brown, Beekes, & Verhoeven,

2011). “Board of directors”or “board”are defined as a

group of individuals who jointly operate and oversee the

activities of a company. A board of directors has the

responsibility to advise managers about operating and

financial affairs, and to supervise their actions in order to

avoid wrong or poor executive decisions. A common view

is that an active board can defend against activities that

will damage the shareholder's interests and, thus,

decrease agency costs (such as defalcation and self-deal-

ing; Beasley, 1996; McIntyre, Murphy, & Mitchell, 2007).

According to the corporate governance literature

(e.g., Kesner, 1988), directors are categorized into two

groups: “inside directors”and “outside directors”. Inside

directors are current or past employees of a firm. They

participate in the daily operations of the business

and, thus, provide an in-depth understanding of the

company's operations to the board. Outside directors,

typically named independent directors, do not participate

in operations and, therefore, are wholly separate from

executives. They can also provide a broad range of knowl-

edge and experience from outside the firm. Therefore,

outside directors have both monitoring and advisory roles

in mitigating agency problems for publicly traded compa-

nies (Huang & Hilary, 2018; McIntyre et al., 2007), and

this dual role highlights the importance of outside direc-

tors in the business world.

Apart from focusing on compositional differences

(e.g., the percentage of outside directors) and some demo-

graphic characteristics of outside directors (e.g., director

busyness, professional expertise), corporate governance

researchers have attempted to investigate the impacts of

board tenure on several areas (e.g., accounting, corporate

governance, financial reporting quality, among others).

Tenure is one of the vital characteristics of a top manage-

ment team (TMT) owing to its relationship with commit-

ment, experience, and the pattern of decision making

(Golden & Zajac, 2001; Katz, 1982). Tenure is associated

with familiarity with an industry or company (Vafeas, 2003),

Received: 22 January 2020 Revised: 16 July 2020 Accepted: 18 July 2020

DOI: 10.1002/jcaf.22464

178 © 2020 Wiley Periodicals LLC J Corp Acct Fin. 2020;31:178–196.wileyonlinelibrary.com/journal/jcaf

and can bring expertise and confidence on investment

decisions (Kim, Mauldin, & Patro, 2014) and strategic

changes (Castro, La Concha, Dominguez, Gravel, &

Periñan, 2009). On the other hand, Katz (1982) argues

that if a TMT has long-tenured members, it will exhibit

greater rigidity and a more significant commitment to

existing principles and precedents owing to the likelihood

that fewer outside contracts will be sought and the ten-

dency for members to anticipate one another's decisions.

In this article, we synthesize the current literature on

both the determinants and consequences of outside direc-

tors’board tenure in public traded companies.

1

The available empirical literature on the determinants

and consequences of board tenure has been published in

journals spanning across several disciplines. We adapt

the Haapamäki and Sihvonen (2019) and Gepp, Harris,

and Vanstone (2019) approaches to collecting papers for

inclusion in this literature review, which combines both

an electronic and a manual search. First, by defining a

review period from 1988 to 2018, and, we identified three

research areas on which to focus our search, namely,

accounting, finance, and corporate governance. Second,

we conducted a keyword search that included: “board

tenure,”“director tenure,”“tenure,”“board duration,”

“director duration,”and “duration.”We used these sea-

rch terms to retrieve articles from the Scopus database

for published papers. We also used Google Scholar to

screen all the relevant papers by using the keywords

mentioned above. Third, we skimmed through the arti-

cles initially derived, to identify whether they test the

determinants and consequences of board tenure empiri-

cally. We included for review only papers published in

academic journals that are ranked in the Australian Busi-

ness Deans Council (ABDC) Journal Quality List, to

maintain the quality of this review.

2

As a result, a total of

36 papers are reviewed in this article.

This article has been organized in the following way.

Section 2 highlights the motivation for this review. Section 3

summarizes all the existing hypotheses discussed in the

extant literature. Section 4 discusses the determinants of

board tenure. The outcomes of board tenure are reviewed

in Section 5. Section 6 provides some suggestions for future

research, and this paper is concluded in Section 7.

2|MOTIVATION FOR THE

REVIEW

Huang and Hilary (2018) argue that the board effective-

ness in its core functions relies on both the independence

of the board and firm-specific knowledge. Further, they

state that “…board tenure captures the tradeoff between

knowledge accumulation and board independence”

(p. 1290). This is because directors can gain firm-specific

knowledge as tenure increases, while increased tenure

leads to familiarity between boards and executives and is,

thus, detrimental to directors’independence. Therefore,

the problem of how to optimize the length of board ten-

ure to maximize the effectiveness of boards has received

increased attention recently, not only from researchers

but also from practitioners.

The existing regulations generally just set a limit on the

number of years a director can serve on the board for each

term (e.g., 1 or 3 years), and directors are subject to re-

election after each cycle of tenure. For example, the UK

Financial Reporting Council (2018) requires re-election of

directors annually. However, the maximum number of

years a director can sit on the board has not yet been lim-

ited by the regulations.

3

Various corporate bodies advocate

limiting independent (outside) director tenure (Libit &

Freier, 2015; Veltrop, Molleman, Hooghiemstra, & van

Ees, 2018). For example, the UK Financial Reporting Coun-

cil (2016) suggests that a director is possibly not indepen-

dent when he/she has served on the board for over 9 years

fromthedateofhis/herfirstappointment.Ifsuchadirec-

tor continues to serve as an independent director on the

board, the firm should disclose the reason for this director

still being considered independent in the proxy statement

and, further, re-elect this director every year.

4

Similar regu-

lations can be found in Hong Kong. According to Hong

Kong Main Board Listing Rules (2019), listed companies

must get shareholders’approval when they decide to

appoint a director who has already served for 9 years.

Another example is that the European Commission

(EC) recommends that European Union-based firms limit

their directors’tenure to 12 years or three terms (European

Commission, 2005). The USA National Association of Cor-

porate Directors (NACD) (1996) recommends replacing

directors who have served on the board for 10–15 years, cit-

ing as their rationale, the fresh ideas and critical thinking

that new directors will bring. Also, the NACD signals direc-

tor tenure as an important characteristic for their focus in

2016 (National Association of Corporate Directors

(NACD), 2015). Both the importance of board tenure and

the absence of regulation to limit board tenure motivate us

to provide this review of the empirical literature, which

could inform regulators, at least in part, of the costs and

benefits of limiting board tenure in public listed firms.

3|EXISTING HYPOTHESES ON

BOARD TENURE

Empirical research evidences that three different hypoth-

eses relate to board tenure. The Expertise Hypothesis was

documented by Vafeas (2003), and it contends that

SUN AND BHUIYAN 179