Together they reinforce a concern we share about director entrenchment when a dynamic operating environment would suggest more frequent board membership refreshment.

The first of these commentaries reported on an address by leading Australian corporate director Catherine Livingstone to the Australian Institute of Company Directors. Livingstone stopped short of promoting mandatory fixed terms for board membership but clearly stated her belief that as companies and the environment in which they operate change, so should the composition of the boards that govern them.

To facilitate the process of updating board capability, Livingstone suggested that six years is a reasonable duration for director appointments. While the average length of board stints in corporate Australia has fallen since 15 to 20 years was commonplace, 10-year terms or more are still not unusual. That is also true in New Zealand.

The second was an academic paper When accountability and identity collide: how director identity shapes board tenure authored by Natalie Elms and Johanne Grosvold. [1] Elms and Grosvold’s research was into why directors may be motivated to remain on boards for longer than desirable. Their finding of self-interest-based longevity in director tenure helps explain why Livingstone has good reason to be concerned about director overstayers.

In exploring Livingstone’s comments, business journalist Elizabeth Knight [2] acknowledged the argument that shorter terms for directors could risk limiting the depth of corporate memory. However, she also noted that leaving directors in their roles for too long can have the greater negative effect of allowing stale opinions to remain. The capabilities needed by boards 20 or even 10 years ago are not necessarily the ones needed today when the external environment is changing rapidly.

To illustrate, Knight refers to mining company Rio Tinto. Had its directors understood the social licence issues facing the company and been knowledgeable about First Nations people and their heritage, would they have presided over the destruction of ancient caves in the Juukan Gorge?

In expressing her concern about overly long director tenure, Livingstone was also making the point about the need for boards to be more diverse. And not just in gender, but in areas of expertise. As Knight reports, “It is no longer enough to plonk a corporate lawyer, an investment banker and a few retired executives on the board and assume the bases are covered”. While companies increasingly understand that boosting female numbers around the board table is what shareholders expect, “…too often, they have drawn from a small pool of female talent to tick their gender diversity box rather than finding the appropriate skill set”.

As examples, Knight refers to Optus, Medibank and a string of other Australian companies that would have benefited from having a director with a working understanding of cybersecurity. She also points to the need, for example, for technologists on any large company board to oversee how generative AI is going to change the nature of the business.

But evolving as a board and injecting more up-to-date and applicable combinations of skills, knowledge and experience requires increased director turnover. This is where the research conducted by Elms and Grosvold into board membership inertia becomes particularly informative.

They cite research that shows prolonged board tenures can have negative consequences for governance effectiveness by, for example, compromising independence and increasing ‘cognitive entrenchment’. Overly long board tenures can also reduce financial and strategic performance, diminish financial reporting quality, and inhibit directors’ ability to challenge and bring fresh perspective to board debates.

While few jurisdictions have mandated a maximum length of tenure, most regulators provide a recommended limit (usually between 9 and 12 years according to Elms and Grosvold). This sends a clear signal about when it is time for non-executive directors to step down to make way for board refreshment.

Despite this, Elms and Grosvold found directors serving on corporate boards for periods of 20, 30 and even 40 years. So, they saw the need to address the following research question: what motivates non-executive directors to serve on boards beyond recommended tenure limits?

It turned out that, contrary to their legal and moral obligation to put the interests of an entity ahead of their own, long-tenured non-executive directors may more motivated to protect their own (continuing) identities as directors.

Their research, while acknowledging agency theory, is framed using the socio-psychological theory of role identity. Their in-depth interviews with directors confirmed that while extrinsic motivators (eg, financial rewards and emoluments) played a part, they were far from the only important driver. Elms and Grosvold also found clear evidence of intrinsic motivations in the form of intellectual stimulation, the professional challenges, and the opportunities for learning and continuous development. These themes suggest that directors also derive significant personal satisfaction from interacting with other directors and adding value to organisational performance.

The strongest motivator to emerge among the study participants—and a primary reason for their continued service on corporate boards—was the personal value they drew from serving as a corporate director. The prestige and social regard derived from the role of director was described by participants as an important source of value that seemed to extend beyond financial rewards and professional development. People like to be directors—and like to know that people know that they are directors.

The idea that individuals want other people to know they hold a position as a director illustrates again the significance of the social recognition associated with being a director. The authors report that this elevated level of social regard was evident across the organisations from which the study sample was drawn and was not limited to the more prestigious public companies.

Elms and Grosvold consider the new empirical finding emerging from their research is the significance attached to being a director, the esteem and social regard attached to the role, and the satisfaction it provides. While often alluded to colloquially, the potential for self-serving motivations to unduly influence directors’ board tenure has not previously been systematically explored and verified in scholarly research.

From this research it is easy to see how the motivation to maintain and validate a director’s self-identity, even their way of life, can easily lead to some directors remaining on a board beyond their ability to make a useful contribution. [3] They may still make fine directors—just on a different board.

These findings have direct relevance for boards and corporate governance practice.

Elms and Grosvold suggest a board renewal policy could be an important defence against directors’ reluctance to leave a board voluntarily. We suggest that, among other things, such a policy should contain:

• a stated expectation that all directors will retire from the board after two terms of three years. Beyond that there needs to be a compelling reason for extending to a third term.
• acknowledgement by each director on election or appointment that they have no expectation of continued membership of the board beyond a second term.
• regular annual board review of the capabilities it would need if all current non-executive directors stepped down—the conclusions of this review to be expressed in an updated capability matrix.
• a regular, searching, independently facilitated peer and management review of director contributions to the effectiveness of the board. The results of this may suggest an even earlier departure for some directors.
• active periodic consideration (say every three years) to prescribing a maximum term where one is not already in place.

Notes

[1] Natalie Elms & Johanne Grosvold (2024) When accountability and identity collide: how director identity shapes board tenure, Accounting Forum, DOI:10.1080/01559982.2024.2303839

[2] Elizabeth Knight ‘This corporate queen is right – the era of board entitlement must end.’ Sydney Morning Herald, 20 March, 2024

[3] According to a recent survey of more than 600 C-suite executives, only 29% rated their board's effectiveness as excellent or good; most said it was fair. Among those surveyed, there was a strong sentiment for higher board turnover: 34% thought two directors should be replaced and 34% said three or more directors should be shown the door.