By Joann S. Lublin
Time may be running out for senior statesmen on U.S. corporate
boards.
Traditional asset managers like State Street Corp. are stepping
out from behind the scenes and publicly taking aim at long-serving
directors for the first time. Joining with activist investors, such
critics say veteran board members often can't keep up with rapid
changes in business.
Companies insist that deeply experienced board members
contribute valuable insights in turbulent times. But the new push
means more boards will face pressure to find fresh blood and send
some highly tenured members packing.
State Street Global Advisors, the asset-management arm of the
major financial-services firm, recently embraced a policy that
takes a skeptical view of boards with average tenure above nine
years. The unit opposed the re-election of about 320 directors
between March and June 2014, estimates Rakhi Kumar, its head of
corporate governance.
State Street will not say which board members it voted against
over tenure, and the votes were largely symbolic. Still, companies
will get the message that the big shareholder isn't happy. "Unless
those boards change, we will hold them to the exact same standard
in 2015," Ms. Kumar says.
BlackRockInc. expects to unveil a director tenure policy in late
January, says a person familiar with the world's largest asset
manager. "Anyone with a majority of long tenure [directors] should
be worried."
And Vanguard Group Inc. soon will raise tough questions with
companies whose boards have "significantly above-average tenure,"
says fund controller Glenn H. Booraem. He handles
corporate-governance issues for more than $1.5 trillion in U.S.
equities.
O'Reilly Automotive Inc. disagrees with such criticism. As of
its latest proxy statement, eight of nine directors had served the
car-parts retailer for 10 years or longer. The board "is very
committed to retaining extremely experienced individuals," says
Mark Merz, an O'Reilly spokesman.
Expect more mainstream investors to add their voices to the
chorus in 2015, predicts Patrick McGurn, special counsel for
Institutional Shareholder Services.The big proxy-advisory firm this
year began to penalize businesses with a significant number of
long-tenured outside directors when it graded their governance
practices. (Such grades help investors decide how to vote on proxy
ballots.)
Behind closed doors, "boards are aware of the tenure issue and
are concerned," says Michele J. Hooper, a governance consultant and
director of UnitedHealth Group Inc. and PPG Industries Inc.
Despite broad debate over bringing new players into boardrooms,
corporate boards have grown more entrenched lately. Companies in
Standard & Poor's 500 stock index elected 371 new independent
directors this year, down from 443 a decade ago, according to a
study by recruiters Spencer Stuart.
And while a large majority of the S&P 500 has mandatory
retirement for directors, more boards have raised their age limits
past 75, the study showed.
Among Russell 3000 companies, 7,197 independent directors--about
31% of the total--have served a decade or longer, an analysis for
The Wall Street Journal by governance researchers at MSCI Inc.
found. That compares with 6,556, or nearly 29%, in 2009.
Activist investors campaigning for board seats often argue that
long-serving directors have grown too cozy with management.
During a proxy fight this summer at Bob Evans Inc., activist
Sandell Management Corp. won four directorships after decrying the
restaurant and food company's "stale and entrenched" board.
The revamped Bob Evans board soon approved 15-year term limits
for members. Chief Executive Steve Davis disliked the move, a
person familiar with the matter recalls. His fellow directors
ousted him Dec. 14.
Only 16 big businesses impose board term limits, Spencer
Stuart's study said. Among them is Target Corp. The retailer
restricts tenure to 20 years --or five years after a director
retires from active employment--to ensure the board "offers diverse
perspectives and fresh ideas," a spokesman says.
Other boards hold open the door and hope long-serving members
will take the hint. Ingredion Inc., for example, lacks a formal
term limit but expects directors to serve no more than 12
years.
"You want to help people move on," says Ilene Gordon, CEO of the
ingredients maker. The informal arrangement led a 12-year board
member to leave in 2011.
Last year, Time Warner Inc. decided that the average tenure of
its outside directors "will generally not exceed 10 years" because
the media giant prefers a mix of tenures, this governance policy
states. Directors' tenure currently averages about 8.2 years.
"Investors liked it," says Fred Hassan, a Time Warner director
since 2009.
Ms. Hooper, the governance consultant, expects numerous boards
will shake things up by identifying new skills they'll need in the
future and in the process, signaling to certain members that it's
time to move on.
Today, a disconnect exists between "a board succession plan that
looks out over a number of years--and the reality of boards taking
(succession) one retirement at a time," says Julie Hembrock Daum,
head of Spencer Stuart's North American board practice.
Some businesses ignore investor complaints about long-tenured
directors. Consider Monster Beverage Corp.
All five non-management board members of the energy-drink
manufacturer have served at least 10 years. State Street opposed
the June re-election of three appointed more than two decades ago,
concludes a review of its disclosed director votes by researchers
Proxy Insight Ltd. for The Wall Street Journal. (State Street
declines to comment about individual companies.)
The trio kept their seats. Monster's share price has soared
since 2005, a spokesman observes. "I am not certain any shareholder
would want board changes with that kind of performance."
It's a similar story at rocket maker Orbital Sciences Corp.
State Street unsuccessfully opposed the April re-election of three
long-serving directors, Proxy Insight found. They included Frank
Salizzoni, a former CEO of H&R Block Inc. who objects to the
asset manager's new emphasis on tenure.
"It's a matter of how good directors are, not how long they've
been directors," Mr. Salizzoni says.
Still, he agrees that older directors should step down at a
certain age. He resigned Orbital's board July 22, the day after he
turned 76.
Write to Joann S. Lublin at joann.lublin@wsj.com
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