Hellen Siwanowicz, McMillan LLP
Under Canadian corporate governance legislation, a TSX-listed issuer must disclose in its annual shareholder meeting materials whether or not the board, its committees and individual directors are regularly assessed with respect to their effectiveness and contribution. If assessments are regularly conducted, issuers are required to describe the process used for such assessments.
This self-assessment by directors usually takes the form of a written questionnaire, whereby, among other things, individual directors are asked to comment on whether the background, experience, competencies and contribution of the existing board members are adequately serving the needs of the issuer. This feedback can then be used to determine whether the issuer should consider inviting a director with a different skill set to join the board of the issuer or replacing an existing director who is either underperforming or whose skill set is no longer required. If assessments are not regularly conducted, issuers are required to describe how the board satisfies itself that the board, its committees and individual directors are performing effectively.
Why are most directors of public companies in Canada typically male and in their early 60s? Over the past few years in Canada there has been considerable media attention on issuers with long-serving directors. It has long been thought that there is a shortage of high quality directors in Canada and it could be argued this is one of the reasons the same relatively small pool of directors appear on various boards and tend to stay on boards for a relatively long time. In the case of directors who are also founders and/or significant shareholders of an issuer, one can easily see how it would be very difficult to encourage such a director to step down and make room for new directors, if in fact the director was unwilling to not stand for re-election.
Currently, there are no Canadian or U.S. regulatory guidelines that require term limits for directors of public companies. An interesting debate is taking place in corporate governance circles regarding whether it would be desirable for issuers to adopt term limits for their directors. Term limits can be defended in the following manner. Directors who have served on a board for a long time may lose enthusiasm and passion for the work required. In addition, directors who stay on a board for a long time may become too closely aligned with management and therefore may be less able to discharge their corporate duties to manage, or supervise the management of the business and affairs of the public company.
In an interesting article by Richard Leblanc entitled “Turnover, not tenure makes the board”[1], Mr. Leblanc argues that academic evidence does not support either excessively long-serving directors or directors who serve on multiple boards – known as “over-tenured” and “over-boarded” directors, respectively. Instead, he states that research shows that over-tenured directors adversely affect firm value and that oversight and long-term performance are compromised for boards composed of over-boarded directors.
Long tenure of board members can be defended in the following manner. A director who has the opportunity to serve on a board for a longer period of time may have a greater and deeper understanding of the issues facing the issuer and may have a more realistic timeframe to tackle those issues. A director is expected to have one or more areas of specific expertise and once an issuer finds a qualified individual with the required expertise who is willing to serve on the board, it is understandable that such an issuer would wish to retain that board member, especially if the director’s skill set is in short supply. In addition, like any organization that is dependent on a group of people working together constructively, having the luxury of time may permit directors to work together more cohesively to address the issues facing the issuer. Imposing term limits on directors may result in issuers losing directors who are making a significant contribution to the board.
The debate regarding term limits for directors is not limited to academics and regulators. In August 2013, the Washington, D.C.-based Council of Institutional Investors, which represents large institutional investors, amended its governance policies to urge boards to consider years of service by directors when deciding on the independence of individual directors. According to the Council, extended periods of service may adversely impact a director’s ability to bring an objective perspective to the boardroom.
Various non-North American countries have adopted term limits. For example, in France, public companies may not call a director independent after 12 years of service, while the Australian Stock Exchange has imposed a similar rule after nine years of service. Other countries such as Spain have also recommended term limits.
As Leblanc suggests, term limits for directors of public companies may be the regulatory response to boards of directors, as self-policing bodies, being incapable of ensuring that underperforming directors do not remain on the board. While we believe that Canadian regulators are not likely to impose term limits for board members of public companies in the near future, it is clear that board effectiveness and refreshment are increasingly prominent issues for investors and therefore will remain an important issue for Canadian public companies.
[1] Richard Leblanc, “Turnover, not tenure makes the board”, Listed - The Magazine for Canadian Listed Companies, Winter 2013.
Hellen Siwanowicz is a Partner at McMillan LLP.