Investors often believe that companies are too slow to refresh their boards.  Directors and CEOs may also think that their companies do not have the right mix of directors, as strategies change and some directors’ skills become dated. 

Yet annual board turnover remains low and fairly steady, Spencer Stuart partner Laurel McCarthy tells podcast host, Skadden M&A partner Ann Beth Stebbins. Together with Skadden partner, Elizabeth Gonzalez-Sussman, Laurel and Ann Beth discuss the ways boards should approach refreshment, and the risk that they could be targeted by activist investors if they do not replace directors regularly. 

Many board policies do not encourage refreshment. The typical mandatory retirement age for S&P 500 directors, has been increasing, and is now at age 75. “We usually don’t see many stats that surprise us in our annual board index, but this one did,” Laurel says. At the same time, the number of boards with mandatory retirement ages has been dropping. 

Meanwhile, board term limits, when present in a company’s bylaws, are usually generous — 15 or 20 years. Proxy advisory services do not have prescriptive policies on term limits, but they question the independence of directors who have served for more than nine years on a board. 

As Laurel and Elizabeth explain, age and term limits can encourage turnover, but they should not be the sole mechanism. Boards need to continually analyze the skills required by the board in light of a company’s changing strategies, and develop pipelines of potential new directors to fill those needs.

Elizabeth points out that companies that have a number of long-tenured directors may be vulnerable to activist investor campaigns if the company underperforms. Demands that a company appoint new directors to improve performance often figure prominently in activist campaigns.

Some investors may favor adding younger board members, particularly where the customer base is young or if technology is central to the business, Elizabeth says. 

In evaluating potential board members, Laurel and Elizabeth suggest prioritizing candidates who have recent experience, are good cultural fits and ask tough questions that management should be prepared to answer. 

Ultimately, they advise boards to be proactive, as succession planning and maintaining a pipeline of potential directors is critical to a company’s future performance. 

💡 Meet Your Host 💡

Name: Ann Beth Stebbins

Title: Partner at Skadden

Connect: LinkedIn

💡Featured Guests💡

Name: Laurel McCarthy

Title: Consultant, Board and CEO Practice, Spencer Stuart

Connect: LinkedIn

Name: Elizabeth Gonzalez-Sussman 

Title: Partner, Shareholder Engagement and Activism, Skadden

Connect: LinkedIn

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The Informed Board is a podcast by Skadden, Arps, Slate, Meagher & Flom LLP, and Affiliates. This podcast is provided for educational and informational purposes only and is not intended and should not be construed as legal advice. This podcast is considered advertising under applicable state laws.