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Board refreshment and composition: the spotlight turns to tenure

By Jessica Tasman-Jones

This article is brought to you by Agenda, an FT Specialist publication that focuses on corporate boards

Alastair Barbour was appointed Liontrust’s non-executive chair in 2019. But he has been on the board since April 2011, taking his overall tenure to 12 years.

Last week it was announced that two non-executive directors, Emma Howard Boyd and Quintin Price, had stepped down with immediate effect. While the asset manager did not offer a reason, sources suggest they left because of Barbour’s length of service.

This follows a recent spat at Scottish Mortgage. Amar Bhidé, who has since left the board, went public with a number of governance concerns at the investment trust, including the tenure of its chair, Fiona McBain, who joined the board in 2009.

The UK corporate governance code recommends that chairs step down nine years after their first appointment to the board. That said, tenure can be extended for a limited time to facilitate "succession planning and the development of a diverse board".

As an investment trust Scottish Mortgage is governed by the Association of Investment Companies code, which allows boards to set their own policy on tenure, according to a spokesperson.

Nevertheress, it has announced McBain will resign at the upcoming AGM after 14 years on the board. Another of its non-executive directors, Paola Subacchi, will also retire at the AGM after nine years on the board. Senior independent director Justin Dowley, who joined the board in 2015, will replace McBain as chair.

The issue of director tenure limits has suddenly been catapulted up board agendas – with investors looking for transparency around why extensions are needed, how long they are required for and firm succession plans.

A typical director spends a couple of years getting to know the company strategy and the board followed by some very productive years, says David Larcker, a corporate governance expert at Stanford Business School. But they might become less active, more complacent and too close to management as they near a decade of tenure, he says.

The downside of tenure limits is that you lose a strong chair with a lot of corporate memory – though Larcker argues there are plenty of good directors who can step in. Term limits also provide a ready way for chairs to leave the board without other directors having difficult conversations with them, he says.

Long-serving do not appear to be widespread. Just 8 per cent of chairs of the 150 largest companies in the FTSE have served more than the recommended nine years, according to the Spencer Stuart Board Index, published last year.

Reasons for extending chair tenures include having gone through a recent acquisition and chief executive succession planning, Spencer Stuart noted.

But chair tenure was one of the highest areas of companies' non-compliance with the UK corporate governance code during the last proxy season, according to Glass Lewis, a proxy adviser.

The uncertainty created by the pandemic meant many board tenures were extended in 2020 and 2021, Glass Lewis said in its Proxy Season Review for 2022 – though this decreased last year as the impact of the pandemic waned, it adds.

Glass Lewis generally recommends supporting chairs with more than nine years of tenure as long as there is a clear rationale. If succession plans haven't been detailed, it recommends voting against nomination committee chairs.

Proxy adviser ISS considers chair re-elections on a case-by-case basis, taking into account factors such as succession planning, diversity, and board independence – in addition to tenure.

Many long-serving board chairs seek re-election with little shareholder pushback. Wetherspoons chairman Tim Martin has been on the board for four decades and still commanded 90 per cent support from shareholders, despite a lack of succession plan from the nominations committee.

Recent board or executive turnover or ongoing M&A or restructuring can be a reason why chairs break the recommended nine year limit, says Sophie Johnson, corporate governance manager at Royal London Asset Management. The board should explain exactly how long they are proposing to extend the term when this happens, she says.

Indeed, McBain told the Financial Times that she had consistently offered to stand down since 2020. But she was asked to remain in post to provide continuity during the pandemic, the retirement of the investment trust's long-serving fund manager and the recent period of market volatility.

A demonstrably independent deputy chair or senior independent director can reassure shareholders if the chair's tenure extends beyond the nine-year norm, says Douglas Wilson, senior sustainability manager at Abrdn.

The corporate governance code update means that directors with more than five years on the board become less likely chair candidates, says Kit Bingham, head of the UK board practice at Heidrick & Struggles. Some boards might need to bring succession planning forward to address that, he says.

Chair tenure doesn't tend to be top of mind for shareholders when a company is performing well, says Bingham. The problem comes, he adds, when you get a period of underperformance and it's at that point that investors will really put a company through the lens of good governance – part of that might be a change of chair.

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