Director term limits come up for review.

• Position: BOARD PRACTICES - Cover story

Our panel participants tackle some thorny topics concerning board tenure: How long before directors get stale or too complacent? Are term limits a necessity or a hindrance to board performance? How useful (or useless) are director evaluations? What should be done about 'duds' on the board?... and other dynamics that determine a board's effectiveness.

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THE DIRECTOR AS POTTED PLANT? Not a welcome image in thinking about effective board governance--i.e., a director of longstanding service who reaches an inflection point, drifting from engaged oversight into listless and lifeless complacency. Yet it is just such a possibility that provided impetus for the following discussion about the pros and cons of board tenure and term limits.

The panelists represent an inclusive spectrum: CEO, board member, academic, investor, and legal. Moderating the discussion is Charles Elson, Edgar S. Woolard Jr. Chair in Corporate Governance and director of the Weinberg Center for Corporate Governance at the University of Delaware. He is also a member of the Directors & Boards editorial advisory board. A bio note on each of the participants:

-- Sanjai Bhagat, professor of finance at the Leeds School of Business, University of Colorado at Boulder, whose "empirical work on director independence, director ownership, and director equity is unsurpassed," says Elson.

-- Kenneth Daly, president and CEO of the National Association of Corporate Directors since 2007; he was a KPMG partner from 1978 to 2005 when he retired to assume the role of executive director of KPMG's Audit Committee Institute.

-- Lawrence Dickinson, corporate secretary of Barclays PLC and "the corporate governance person," as Elson says of him, at the major British banking institution; he offers a singular perspective on board tenure policies and director independence based on the U.K. governance model.

-- Jon Hanson, founder and chairman of the Hampshire Real Estate Companies, whose board service includes lead director at Prudential Insurance and chairman of HealthSouth Corp. following the leadership crisis that the health care provider faced with the ouster of former CEO Richard Scrushy.

-- Ann McLaughlin Korologos, former U.S. Secretary of Labor in the Reagan administration, is chairman of the RAND Corporation and a veteran director currently serving on the boards of Kellogg Corp., AMR Corp. and American Airlines, Host Marriott Corp., and Vulcan Materials Co.

-- Robert P. May, chief executive officer of energy company Calpine Corp., who has served in leadership positions with several companies over a 30-year career, including Charter Communications, Cablevision Systems, and Health-South (serving as an interim CEO and on the board with Jon Hanson and Charles Elson during its turnaround).

-- John W. Noble, vice chancellor of the Delaware Court of Chancery since November 2000; he practiced law with the firm Parkowski, Noble & Guerke P.A. in Dover, Del., before joining the Court of Chancery.

-- Raymond Troubh, a professional director who has served with distinction on some 30 boards over a three-decade career in the boardroom, including chairing the board of Enron Corp. in its post-bankruptcy workout; his current directorships include Diamond Offshore Drilling Inc., Gentiva Health Services Inc., General American Investors Co., and Triarc Companies.

-- Ann Yerger, executive director of the Council of Institutional Investors since 2005 (and with the organization since 1996); the Council includes more than 140 public, corporate, and union pension funds managing over $3 trillion in assets.

The roundtable was held in October 2007 at the University of Delaware's Alfred Lerner College of Business. This is the third of the governance center's roundtables that Directors & Boards has featured in our pages. Previous panels addressed "Whose Company Is It Anyway?" in 2000, a roundtable that launched the center eight years ago, and "Handling Dissent in the Boardroom" in 2004.

Excerpts from the debate on board tenure follow.

--James Kristie

Charles Elson: Historically, once you got elected to a board, you were there for the duration as long as you wanted to stay. The only thing that would knock you off would be an age limit. A lot of boards did have age limits, typically between 68 and 72. For boards that didn't, you could stay as long as you wished, which meant people could be there for 20 years or more.

Starting a number of years ago, questions began to be raised as to whether this was a good idea. The arguments in favor of long-term directors were that they have experience, that it is hard to replace them, and that once you have been there a long time you have a good sense of the company and can be a better monitor. The argument against long tenure was the inclination to get stale in the job and that, after 10 years or so, there were concerns--raised by CalPERS, in particular--that you were not viewed as independent of management, i.e., lengthy tenure compromised your independence.

Another view, one a bit in between, was not that you were no longer independent after 10 years but that you got too comfortable. It becomes hard to innovate against yourself. The more accustomed you are to the procedures and approaches the company takes to various issues, the more you lose your ability to be critical of what management is doing and to be aware of problems that develop, and you become a less active monitor than you should be.

All this started the call for term limits. The National Association of Corporate Directors, in its 1996 Report on Director Professionalism, was the first document to issue an affirmative call for some kind of term limit. The NACD suggested a term limit of between 10 and 15 years, after which the board would say to a director, "Thanks, but you need to do something else." No one could stay on the board beyond 15 years. There was an alternative view that was proposed at the time that term limits really aren't necessary and that the key is having a director evaluation process. If everyone is evaluated on an annual basis, you can allow someone to stay as long as they are productive.

Let's have each of you state your initial opinion on the subject. Ray, lead us off on this notion of the term limit as a good thing or bad thing--a necessity or a hindrance to board performance.

Ray Troubh: On balance, whether it's 60-40 or 70-30, I think term limits are good--good for the corporation and good for shareholders. The arguments against long tenure are all correct. I find in my own experience that a coziness, a comfortableness, develops between and among the directors, the management, and the staff, which doesn't produce the most electrifying results that one would like. The blood gets diluted, so to speak. I would say 15 years is about right, because if you do get young people on boards, after 15 years they still have a future to do other things.

I also would vote for age limits. I find it very difficult to apply a test at a point in one's career that says, "You're good" and "He's bad," or "He's going to go, and you're going to stay." That's very awkward. You're better off having some automatic test that applies to everybody across the board.

Ann McLaughlin Korologos: I would be on the side of saying term limits are neither necessary nor a hindrance as long as you start with a nomination process of finding the best people, accompanied by an evaluation and renomination process. In today's culture, with policies on age limits, resignation on job loss, and other factors affecting individuals, it's a little more acceptable to go on and off boards without staying for 20 years. Twelve to 15 years is more often the reality. But even then there are exceptions extended by nominating committees and boards.

I took a look at several of my own boards. Since I joined the board of Kellogg Co. over 17 years ago, we've had 19 people join the board and 21 leave. The average tenure is 8.8 years, and we've had five CEOs during that time. At Host Hotels, where I went on the board 15 years ago, six directors joined, six left...