Retiring Underperforming Directors

By: Paul C. Winum

The best boards are composed of a diverse group of committed directors who all bring experience, insights and high value relevant to the business of the organization they govern. When nominating and governance committee chairs select new directors to serve on boards, it is usually done after thoughtful consideration, using a skills-matrix approach, of what knowledge and capabilities the board needs to provide proper guidance and oversight. However, as the business context and operating landscape within which companies function are constantly changing, often at a very fast pace, the know-how and skills of directors don’t always keep up with those changes. In a 2016 survey of 620 directors who collectively served on more than 1,000 boards, two-thirds of those who responded reported that the value they were expected to contribute had changed over the course of their tenure. For those who served on boards for more than five years, that percentage jumps to 88%. The potential gap between the knowledge and skills of incumbent directors and the knowledge and skills of what the current operating context requires of directors presents a significant challenge.

One important way in which that gap can be addressed is through robust director-education efforts. Despite this need, 73% of the directors we surveyed reported that the boards they serve on have no mandatory continuing-education requirement for directors. Another way is to replace directors who may have been a good fit against governance needs in the past but who no longer fit the desired criteria. Interestingly, almost all the directors who responded (99%) said they would want to know if their colleagues thought it was time for them to retire from the board, and one-third further acknowledged that there were directors on their boards who should be replaced so the board could be replenished with new skills and expertise. However, doing this is not easy. The majority of the directors in our survey (59%) indicated that it can be very or extremely difficult to exit a director from a board without formal age or term limits. The difficulty frequently lies in the challenge of having the tough conversations with directors who have loyally served on the board for many years.

According to data gathered by Equilar and reported by the Society for Corporate Governance in 2017, the average tenure of directors in both large-cap and small-cap companies is more than nine years. Furthermore, for those boards that do have tenure limits, they range from nine to 20 years. (See chart below.) With those long average tenures, it is not surprising that some directors stay on boards past their prime-contribution years. So how can boards overcome the challenge of ensuring they are composed of directors with skillsets and capabilities that meet the needs of the organizations they are charged with governing?

The answers to this question lie in having processes to annually evaluate the skills matrix and how each director maps against those needs, as well as in courageous board leaders willing to have difficult conversations. Here are some steps boards can take:

  1. Nominating and governance committees should annually update the skills matrix and the fit of current directors against the matrix.
  2. Board bylaws and committee charters need to specify that every director’s contribution and fit with the board’s needs will be assessed each year.
  3. When a director joins a board, there should be a fulsome conversation led by the board chair or lead director about what contribution that director needs to make.
  4. Re-nomination and re-election should not be automatically assumed but rather determined each year.
  5. Boards should also have rigorous continuing-education requirements and expectations for directors that they will stay current on the range of issues relevant to the business of the organization and best-governance practices.
  6. Each board member should receive annual feedback about how they are contributing and how they might contribute even more value in the future. Continuing-education actions can be outlined for each director at these feedback meetings.
  7. Succession planning for board- and committee-leadership roles should be an annual process, with exit timetables outlined in the skills matrix for directors who no longer fit board needs or whose tenure approaches the specified term limit.

Meeting the challenge of retiring directors from boards is best accomplished when an ethos is established whereby it is understood that as the business landscape changes, the experiences, expertise and value proposition for board members need to keep pace with what the organization needs from its board. This process is not just about retiring underperforming directors but also ensuring a continual refresh of the board’s capability to contribute value. Conscientious executives who decide to join a board want to add value and make a positive difference. Rather than rely on general assumptions about how to do that, new directors should be engaged in discussions about how the board is expected to add value and the role they need to play to contribute to that value. Taking these steps will ensure that boards are composed of directors who are fully engaged and maximizing the contribution they make to the success of the enterprise.

This article was originally published on the Corporate Board Member website.


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