Tenure limits for directors – any demerits?
There are arguments in favour of term limits for directors. By establishing director tenure limits, organizations make room for rejuvenation and the on boarding of Directors with new skillset and relevant experience. Boards also set tenure limits to allow for membership to be refreshed periodically.
As businesses evolve, the skillsets required for Board effectiveness change. Tenure limits thus enable the Board to respond to change and be refreshed periodically. This is more so in the age of disruption where technology is rapidly changing the nature of business operations.
Also, in favour of tenure limits is the need to safeguard the independence and sound-judgement of directors. When directors stay on the board for too long, there is the tendency to develop an allegiance towards management, engendered by familiarity which could reduce the motivation to criticise management proposals.
In Nigeria, term limits have been typically set by industry regulators via the respective Corporate Governance Codes. These limits relate to cover Executive, Non-Executive and Independent Directors. The Nigerian Code of Corporate Governance 2018 however leaves the issue of term limits for Executive and Non-Executive Directors to the discretion of the Board, based on the peculiarities of the Company. It however sets term limits for Independent Directors at nine years. Those who argue against tenure limits note the cost of recruiting new directors as a major demerit of limiting the tenure of directors on the Board. Good directors don’t grow on trees and an effective board will typically undergo a rigorous Director Selection process to replace exiting Directors.
Beyond cost, recruiting a director with the right fit can be time consuming and sometimes the board ends up with a less than optimal choice where it does not have luxury of time or the patience required.
Another argument against tenure limit is the propensity to impact on the presence of institutional knowledge on the Board. According to Hillman and Dalziel, “Firms ending in financial distress are likely to have Boards with shorter tenures compared to those with longer tenure.
More so, the expertise hypothesis is used to argue that longer tenure is associated with improved director performance, because directors develop more expertise over time and become more willing to criticize management. Setting tenure limits also impacts the Board’s ability to replace non-performing or dysfunctional directors as there is a tendency to allow them run out such fixed tenure.
Bringing it all together, while there are immense advantages that accrue from setting tenure limits, one cannot wish away the demerits of such tenure limits. According to Kennedy Mwengei and David Kosgei, the board that is long tenured without any limit will breed Management friendliness and allegiance and given this atmosphere, the board might lack the effrontery to carry out its oversight function over Management – this is not very healthy for the enterprise.
It is thus important to strike a balance as contemplated by the Companies and Allied Matters Act which requires one third of directors to retire periodically. The Board can use this to refresh the Board, whilst retaining those Directors that have institutional knowledge and experience required to create the right balance for Board effectiveness.
Adeyemi is the Managing Director, DCSL Corporate Services Limited. She can be reached via email at firstname.lastname@example.org.