Social recognition and the cachet of being a corporate director are stronger motivators than money for non-executive directors to remain on boards, causing stagnation and potentially lowering shareholder value, an international study by QUT and UK researchers has found.
- Desire for social recognition hampers board renewal – new research
- Shareholder value
- Tenure limits and renewal policy needed
Dr Natalie Elms, from the QUT School of Accountancy, and Dr Johanne Grosvold, from the University of Bath’s School of Management, interviewed non-executive directors (NEDs) in Australia from public and private companies, government organisations and mutual banks to explore motives of NEDs who “outstay their welcome”.
“Shareholders have long complained about “pale and stale” boards where the directors linger on well after the governance guidelines suggest they should leave,” Dr Elms said.
“We found that some board directors are reluctant to leave the board if it means they can no longer call themselves a director.
“If they don’t step down when the (unofficial) tenure guidelines of around 10 years suggest they should, it makes it hard for boards to renew and diversify and gain the new skills and insights they need.”
The researchers said that while financial reward and intellectual stimulation undoubtedly played a part in their residency, it was the thought of no longer being able to call themselves a board director that compelled them to stay.
‘It’s like another world, where else do you get the respect just because of your role [as a director]?’ one NED interviewed for the study said.
‘People like to be a director – and like to know that people know that they’re a director,’ said another.
Dr Grosvold said the findings showed that for some NEDs their identity as a board director was more important to them than acting in the interests of shareholders.
“When it’s a healthy time to step down they don’t want to relinquish an important part of who they are, so instead they ignore their accountability to shareholders,” Dr Grosvold said.
“Regulators recommend a limit of between nine and 12 years for NEDs to step down and give way to new candidates, and participants in our study spoke of a maximum tenure of 10 years being ideal.
“Nevertheless, drawing on experiences of 11 NEDs across 68 corporate boards, directors could easily recount board colleagues who had served for 15, 18 and more than 20 years.”
Dr Elms said prolonged tenure was a governance concern for corporate boards and exposed the limits of a board’s self-regulation.
“People with a role in life that is important to them tend to stick to the conventions that govern that role. Herein lies the paradox: board directors who value the identity the role imparts should be more likely to adhere to the rules and step down at the appropriate time, but they are not doing so.
“The issue of term limits is important for ensuring that directors act in the best interests of shareholders, and a board renewal policy can act as an important defence against directors’ reluctance to leave a board voluntarily.”
When accountability and identity collide: How director identity shapes board tenure, is published in Accountancy Forum.
Main image: Getty Images, Credit: Per Windbladh, Collection: The Image Bank
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