Big Investors Question Corporate Board Tenures

Large U.S. companies increasingly are governed by board members who have held their seats for a decade or more, even as some big investors question whether these directors serve shareholders’ best interests. 

At 24% of the biggest U.S. companies, a majority of the board has been in place for at least 10 years, a Wall Street Journal analysis found. It is a marked changed from 2005, when long-term directors made up a board majority at 11% of large companies. One factor driving the change is low turnover among directors.

“Having some long-term board members is not bad in and of itself—but too many raises red flags about the board’s independence and succession planning,” says Scott Stringer, who oversees more than $150 billion in public pension funds as the comptroller for New York City. 

Long-tenured directors can offer companies institutional memory and deep insight into company operations across a variety of economic and competitive environments—as well as, potentially, the experience to question even longtime managers. Yet some investors worry that longtime board members may grow too close to the companies and management teams they are supposed to oversee, and lack the critical eye and fresh ideas that newer directors likely bring.

At Costco Wholesale Corp. COST 1.79% last year, just two nonexecutive directors had served less than a decade, and the other eight averaged 19 years on the board. Nine of 11 nonexecutive directors on advertising giant Omnicom Group Inc.’s OMC -0.41%board last year had held a seat for a dozen years or more—five of them for at least 18 years. At both companies, a majority of directors were in their 70s.

Richard Galanti, Costco’s finance chief, said shareholders rejected a proposal early last year to limit director tenure at the company. The warehouse retailer named two new directors to its board later in the year, replacing two directors who left in previous months, including former Republican presidential candidate Ben Carson in May, after 16 years on the board.

An Omnicom spokeswoman said the board adopted a mandatory retirement age in December, but declined to say what age was chosen. “Our goal is to reduce board tenure by almost half,” the spokeswoman said.

Some investors and proxy advisory firms aren’t waiting for companies to make changes. BlackRock Inc., State Street Global Advisors and other big money managers have begun opposing the re-election of some directors with extended tenure. 

“The tenure issue is one that is bubbling below the surface,” says Douglas K. Chia, who until January was corporate secretary at Johnson & Johnson and now heads a corporate governance center at the Conference Board.

Overall, one-third of individuals who served on S&P 500 boards in 2005 still held seats last year, the Journal found in its analysis of data from MSCI ESG Research. One director in every six has held his seat for at least 15 years. And just 7% of board seats turn over each year at large companies, recruiting firm Spencer Stuart found in an analysis last year.

About 4,500 directors serve on the boards of S&P 500 companies—typically longtime business, government and nonprofit officials who can earn more than $250,000 a year for each seat they hold.

Seasoned directors offer valuable institutional memory, and can serve as a counterweight to longtime executives. “Longer-term directors may be more likely to criticize management,” says William Libit, a law partner at Chapman and Cutler LLP in Chicago who works with corporate boards. 

At the same time, efforts to bring more women and minorities onto boards are hindered by low turnover. And after years on the same board, directors may lose their objectivity. “There’s a risk that extended tenure could lead a non-management director to begin thinking like an insider,” Mr. Libit says.

INSIDE AMERICA’S BOARDROOMS

Part of a series on how business is done on corporate boards.

• Doctors to Play Key Role in Fate of Redstone Media Empire
• Boards Get More Independent, But Ties Endure
• Two-Person Board Committees Exist at Some Big Firms
• Three, Four, Five? How Many Board Seats Are Too Many?
• Data: How U.S. Companies Stack Up in Terms of Board Pay

The California Public Employees’ Retirement System, which manages nearly $280 billion in assets, said this month that directors can be “compromised” after 12 years on a board, and companies should explain any decision to consider a director independent after that point.

State Street Global Advisors, with more than $2 trillion under management, says it voted against 339 directors last year and 355 the year before due to tenure concerns.

BlackRock, with $4.6 trillion under management, revised its U.S. voting guidelines in early 2015 to signal that it might oppose directors with long tenure, among other perceived failings.

The rise in long-tenured directors also is helping to push the overall age of corporate boards higher. Median age for S&P 500 directors has risen to 63 years old, from 61 in 2005. Today, one of every five directors is at least 70 years old, nearly double the rate a decade ago, the Journal analysis found. Just two boards had a median age below 50: Facebook Inc. and online travel site TripAdvisor Inc.

Among S&P 500 companies, only 13 had limits on director tenure last year, down from two dozen in 2010, according to Spencer Stuart—while two thirds explicitly disavowed tenure limits. And boards with mandatory retirement ages have been nudging them higher as directors age; today a third have set them at 75 or older, compared with just 8% in 2005, Spencer Stuart found.

Among the large companies that limit tenure, there is little agreement on how long is too long. Wal-Mart Stores Inc. has a 12-year cap, while directors at rival Target Corp. can serve as long as 20 years. 

General Electric Co. adopted tenure limits last year, requiring directors other than the CEO to retire after 15 years, with a two-year transition for current directors. The move marks something of a reversal for GE, which successfully urged shareholders in 2013 to reject an investor’s proposal for stricter limits. A mix of tenures means GE’s board will have a mix of fresh perspectives and experienced directors, a spokesman said.

Outside the U.S., regulators have sought to slow the advance of long-serving directors. In France, directors lose their independent status after 12 years. Hong Kong requires companies to re-elect directors with a separate vote after they have served nine years.

Applying similar rules to large U.S. companies would have profound effects: Thirty percent of U.S. companies would no longer have an independent majority of directors if board members were considered insiders at a decade, MSCI ESG Research concluded in a report last year.

Write to Theo Francis at theo.francis@wsj.com and Joann S. Lublin at joann.lublin@wsj.com

Appeared in the March 24, 2016, print edition as 'Directors’ Tenure Draws Scrutiny.'