The tenured director: Co-opted or invaluable? Assertions to the contrary, it is not clear that long service is a threat to good governance.

• Author: Raymond, Doug
• Position: LEGAL BRIEF

CalPERS, the California Public Employees' Retirement System, recently proposed new Global Governance Principles for public companies. These principles incorporated changes to its approach to board independence. The revised principles advocate annual evaluations of independence for any director who has held that position for 12 years or more. This annual evaluation must be made available to shareholders, highlighting CalPERS's perspective that the independence and objectivity of a director may be compromised after extended board service.

In general, directors had been considered independent if they were not employees of the company and had not engaged in significant related party transactions. Today, the concept of independence is more nebulous. Many groups have argued that directors with no financial ties to management may be less likely to critically evaluate management if they have served as directors for a long period --that after years of collaboration, directors may have a tendency not to question management's decision making and strategy. This concern is echoed abroad, where the European Commission advocates a maximum tenure of 12 years and the United Kingdom employs a "complain or explain" model similar to CalPERS.

Further complicating the discussion is the growth in director compensation. Over the past 10 years, director compensation has grown, on average, more than 5% per year, and now the median yearly total direct compensation for Fortune 500 directors is approximately $250,000. With increasing compensation, some argue that virtually all directors are less likely to rock the boat.

While independent perspectives and integrity are important to good governance, there is not a clear formula to produce this. In fact, many institutional investors have criticized mandatory board refreshment and term limits as artificial and arbitrary. The Wall Street Journal recently reported that of the S&P 500 companies surveyed in 2015, only 13 had mandatory retirement policies, and this metric had significantly declined over the last five years. As an alternative to pushing for term limits, other institutional investors consider opposing long-tenured directors only if there is evidence of board entrenchment or insufficient board diversity.

Despite the recent attention on board refreshment and term limits, corporate directors are serving longer. According to the Wall Street Journal, in 2005 only 11% of large companies had a board where the majority...