Capping board tenure would be activist kryptonite

Vail Resorts

18/02/2025 10:00

(The author is a Reuters Breakingviews columnist. The opinions
expressed are his own.)
    By Jeffrey Goldfarb
       NEW YORK, Feb 18 (Reuters Breakingviews) -
I t’s almost as if U.S. companies want to attract the attention
of headstrong investors. Despite years of warnings about the
dangers of allowing board members to overstay their welcome, the
habit persists and keeps inviting trouble. Placing a time limit
on how long directors can serve would have many benefits. One of
the biggest would be to ward off dissident shareholders, or at
least force them to refresh their own tired thinking.
    Although experience, continuity and historical knowledge are
valuable attributes in the boardroom, U.S. companies tend
to overdo it in a way that breeds stagnation and crony
capitalism. It’s no wonder shareholders are increasingly zeroing
in on the inertia. Two-thirds of activist investor campaigns
between 2021 and late 2024 preyed on companies with at least
three directors in their roles for a decade or more, according
to law firm Skadden, Arps, Slate, Meagher & Flom, citing data
from investment bank Evercore. Ski slope operator Vail Resorts
 MTN.N  and casket maker Matthews International  MATW.O  are two
of the latest to come under siege, with tenure as a factor.
    At Matthews, the stock price has tumbled by nearly half
since mid-2023, inviting pushy investor Barington Capital to
note that the board’s collective tenure averaged more than 11
years, 60% longer than at the typical company in the Russell
3000 Index  .RUA . The board defended its composition, touting
the addition of two new independent members over the past
two years. Even so, proxy advisory firms Institutional
Shareholder Services, Glass Lewis and Egan-Jones all
recommended that investors support Barington’s three nominees at
this week’s shareholder meeting.
Companies often push back, and there’s little evidence to
suggest that management teams see a problem. Fewer than 10%
of S&P 500 Index  .SPX  constituents impose a cap on director
tenure, and most that do set it at a protracted 15 years or
more, according to corporate governance research firm
ESGAUGE. Retailer Target  TGT.N  and networking gear maker Cisco
Systems  CSCO.O  will only show a non-executive director the
door after two decades.
    Many companies insist they don’t need a binding rule
to routinely bring in fresh faces, but lingerers persist. As of
last year, nearly 1,300 sitting independent directors,
accounting for more than a quarter of the total at S&P 500
members alone, had been around for more than a decade. About 13%
of them racked up at least 15 years of service, making it hard
to take an independent designation seriously.
    Goldman Sachs alumnus John Thornton, for example, is the
lead independent director at carmaker Ford Motor  F.N , where he
has been on the board for nearly three decades. Former
Blackstone President Tony James has racked up 36 years as a
director at retail giant Costco  COST.O , more than seven of
them as chairman. And with 50 years at insurer W.R. Berkley,
ex-investment banker Mark Shapiro is the longest-serving
independent director at a company in the benchmark index, per
ESGAUGE data.
    More broadly, the United States held the ignominious
second-place spot for longest-serving non-executive directors,
among 17 countries analyzed by hiring consultancy Spencer
Stuart. At almost eight years, the average U.S. board member’s
tenure lagged only that of Mexico and was nearly double
the length of service in Britain, where a governance
code generally considers a director’s independence impaired
after nine years. Hong Kong’s bourse operator also recently
enacted rules that will ban boards from having independent
non-executive directors who have served for more than nine
years.
    There are sound financial reasons to avoid entrenched
boardrooms, and the stale thinking they often beget. Companies
generate their best returns when outside directors have an
average tenure of eight to 10 years, before performance starts
falling, according to a comprehensive study published in 2018 by
Singapore Management University. Boards with shorter tenure make
better investment decisions that lead to higher valuations,
while ones with longer tenure “are more likely to engage in
value-destroying acquisitions,” researchers concluded.
    One problem is that, because of the clubby nature of boards,
directors are often reluctant to usher out colleagues lest they
be ejected next. Privately, however, directors have never been
less happy with their peers, based on consultancy PwC’s most
recent annual survey. Half the respondents said at least one
member should be replaced and a quarter reckon it’s time for at
least two to be ousted.
    Mandated turnover would limit contributions from some useful
directors but probably push out far more timeworn ones. Market
discipline has its limits, too. There just aren’t enough
activist investors to go around, and many boards either hope to
escape notice or find other reasons to overlook the evidence.
    Performance can help insulate against external
criticism. Warehouse builder Prologis  PLD.N  implemented a
15-year maximum term in 2023, only to scrap it the following
year after shareholders indicated they did not think it was
necessary. The $110 billion company has a 75-year age limit on
membership, as some other boards do, but five of its 11
directors, including the lead independent one, have served for
at least nine years. With a roughly 175% total shareholder
return over the past decade, outperforming major real estate
investment trust yardsticks, Prologis could make the case that
its board evaluation process is not obviously hurting
shareholders.
    Sweeping rule changes also would be hard to enact.
Individual U.S. states hold power to regulate corporate
governance, but that approach would create an awkward
patchwork. American stock exchanges, too, could adopt standards.
They’re probably hesitant to do so, however, after a federal
court in December struck down Nasdaq’s board diversity rules,
saying the U.S. Securities and Exchange Commission exceeded its
authority by approving them.
    This ultimately leaves the decision up to companies
themselves. If they’re not persuaded by the benefits of steadily
embracing new perspectives to complement ingrained ones, or that
longer-tenured boards are linked to weaker financial
performance, maybe they can appreciate the defensive value. By
firmly capping service at a decade, companies would neutralize
a powerful weapon in activist investors’ arsenals. By doing so,
it would compel such agitators to find some new ammunition of
their own.       

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    <^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^
More board members want more peers replaced    https://reut.rs/41kAKKI
US non-executive directors linger for longer    https://reut.rs/4hEvk2R
Many 'independent' directors have served 10+ years    https://reut.rs/3QHJYe9
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 (Editing by Peter Thal Larsen and Streisand Neto)
 ((For previous columns by the author, Reuters customers can
click on  GOLDFARB/ 
jeffrey.goldfarb@thomsonreuters.com))