Board tenure: how long is too long? There are benefits and risks in lengthy director tenure, but the biggest risk lies in not being strategic in your board talent management.

• Author: Canavan, Judy
• Position: Board Guidelines

FOR YEARS, there has been debate about publicly elected officials' tenure and whether term limits ought to be enforced to prevent their becoming too entrenched and too distant from the people they were meant to represent. Now this type of debate seems to be bleeding over into the boardroom. In fact, all the major ratings agencies other than Institutional Shareholder Services (ISS) include some sort of assessment of board tenure as one of their criteria for evaluating board effectiveness, with longer tenure potentially leading to lower scores. (In its ratings, the Corporate Library's Board Analyst views boards with a broad range in tenure favorably; GovernanceMetrics International examines patterns of longer-tenured directors; and Standard and Poor's Corporate Governance Scores evaluate director tenure on a case-by-case basis.)

Interestingly, in an analysis of 255 companies in the Corporate Library's ratings database, we found that boards rated by the Corporate Library as least effective (a grade of D or F) tend to have the longest-tenured directors (Exhibit 1). Does this finding indicate some board members have potentially been overstaying their useful lives? Yes ... and no. Some companies are undoubtedly in need of new blood. At a minimum, this assessment serves as a warning bell and provides an opportunity for companies to explore the following questions:

* What are the benefits and risks associated with longer-tenured boards, particularly as they relate to a given company's situation?

* Is there an optimum tenure for board membership?

* If managing tenure is not the answer, are boards taking appropriate steps to ensure that they proactively manage and regularly upgrade their director talent?

While tenure probably shouldn't be called out as a significant criterion for continued board membership, boards do need to keep their talent refreshed. Organizations may want to consider the best range of tenure for the future, given their unique characteristics, and include length of service as one element they assess to enhance overall board effectiveness. More important, however, companies could benefit from being more strategic about managing their board talent, just as they are becoming more conscious of managing their employee talent.

Clear benefits, visible risks

Until recently, long tenure was rarely a concern. In fact, it was often a source of pride, particularly for boards with elite membership. Directors joined boards and simply stayed until there was an inciting reason to leave, such as a transaction, a change in management, a change to the corporate structure, or a change in their personal situation. And with this system came benefits, including:

-- Continuity of organizational knowledge;

-- Credibility in the market;

-- Improved board dynamics and collegiality.

In some instances, these benefits have clearly led to improved performance. For example, a study of IPOs found that "greater board stability is associated with improvement in subsequent performance among poorly performing firms."

With the recent scandals and new governance expectations, however, the risks associated with longer tenure have become more visible and critical. Many of these risks are the flip side of the benefits. As members of the board become more entrenched, they may:

-- Fail to keep up with changes to the business;

-- Defend...