US groups face pressure to refresh boards

Google’s parent Alphabet and Warren Buffett’s Berkshire Hathaway head a list of more than 800 US companies that could come under pressure to refresh their boards, under new guidelines being floated among shareholders.

ISS, the influential corporate governance adviser, is considering targeting companies where boards are stuffed with long-serving directors or where there have been no new members for years.

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In its latest annual survey ISS is asking clients their opinions of boards that have failed to appoint a new director in five years, where the average tenure of directors exceeds 10 or 15 years, or where more than 75 per cent of directors have served 10 years or longer. Its findings could form the basis for changes in its investor voting guidelines.

A Financial Times analysis of data from ISS Analytics, the company’s research arm, reveals that more than one in four of the 2,900 US boards closely tracked by ISS would fail on at least one of the mooted measures, including nearly 200 companies that have an average director tenure greater than 15 years.

Alphabet and Berkshire are the largest companies to fail on two, but the list of double-offenders also includes retailer Bed Bath & Beyond and Intercontinental Exchange, owner of the New York Stock Exchange.

On Berkshire’s board, Bill Gates, at 11 years, is one of the company’s freshest appointments, while four others have served more than 20 years. At Alphabet, five directors have served more than 15 years, including Google founders Larry Page and Sergey Brin.

Questioning the effectiveness of “male, stale, frail” boards reflects growing investor interest in improving director diversity, with shareholders increasingly demanding a portion of new directors as well as a formal board refreshment process.

Potential sanctions ISS could consider include voting against the chair of the board’s nomination committee or against long-tenured directors. If a consensus emerges, it could still be several years before voting guidelines are changed.

“The issue with board refreshment practices is not that one or two directors have been on the board for a longer period, but that the board doesn’t refresh periodically enough to add new blood,” said Marc Goldstein, head of ISS’s policy steering committee. “If there’s a mixture, that’s of less concern.”

The absence of a formal corporate governance code in the US, unlike in most markets, has been cited by investors as the reason American directors tend to be older, longer serving and less likely to be women than in many other countries.

The voting guidelines from ISS and Glass Lewis, its rival advisory service, are the nearest the US comes to a code of best practice, and they hold considerable sway because public pension funds and institutional investors follow their recommendations.

At Alphabet and Berkshire, more than three-quarters of the directors have served more than 10 years, and the average tenure is greater than 12 years. Both have, however, appointed directors in the past five years, unlike 100 other companies in ISS’s data set. Alphabet and Berkshire declined to comment.

Paula Loop, leader of PwC’s governance insights centre, said senior directors can bring tremendous value, having a “complete picture” of a company. “But you also want new people. They’ll ask new questions, things that might be obvious, that no one else would ask, and it brings out good debate,” she said. “If the majority of your board is long tenure, I think you’re missing out on important insights.”

Corporate governance codes in most markets assume that long-tenured directors are less independent after years of working with a company and its management. Their removal also offers an opportunity to increase board diversity in age, gender, race and skill sets needed today such as cyber security, Mr Goldstein said.

The findings come shortly after an FT analysis which that the diversity of US boards lagging behind Europe’s in regards to age, tenure and gender. In Britain, for example, there is a UK code of practice that stipulates that if a director has served more than nine years on a board they are no longer classified as independent.

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