As we've previously discussed, ISS released its 2014 Corporate Governance Policy Updates in November of last year. ISS also announced that it was continuing consultations on a number of issues that could result in policy changes for 2015, with director tenure being identified as one such issue in the U.S. and Canada. Currently, ISS' Benchmark U.S. and Canada Voting Policies do not consider director tenure as a factor in setting vote recommendations in director elections.
According to a survey conducted by ISS, close to three-quarters of investors consider long director tenure to be problematic. While long tenure directors have experience and company-specific knowledge that may positively affect corporate decision-making, there is concern that long tenure may undermine the independence of directors.
ISS is thus exploring three potential approaches to its voting policy approach regarding director tenure. Specifically, the options being explored by ISS are to: (i) "consider the mix of director tenures on the board as a key factor when determining a vote recommendation on members of the nominating committee"; (ii) favour classifying "directors with lengthy tenures as non-independent and apply existing board-related voting policies as it relates to director independence"; and (iii) maintain the status quo, i.e. no policy position on this issue.
ISS does not provide a definition of "lengthy tenure" in its consultation document. International corporate governance codes that consider the issue generally set a threshold of nine to 12 years. Meanwhile, investors surveyed by ISS identified 10 years as the threshold beyond which director independence could be called into question. If such a threshold were to be adopted by ISS in North America, a significant number of directors would be potentially affected. Indeed, in the U.S., the average tenure of S&P 500 boards is 8.6 years according to the Spencer Stuart Board Index. In Canada, data marshalled by the Clarkson Centre for Board Effectiveness indicate that about three-quarters of the companies of the S&P/TSX Composite Index have at least one board member with a minimum of 10 years of service and more than a third of such companies have at least 50% of their directors who have served at least 10 years.
Ultimately, it remains to be seen whether ISS will amend its voting policy to address director tenure. Investors consulted by ISS have expressed reluctance toward the imposition of strict limits on tenure and ISS recognizes that empirical studies on the impact of director tenure on financial performance provide mixed results. However, the fact the issue is being considered by ISS suggests that boards would be well advised to consider term limits, otherwise ISS or the regulators may do it for them.
This is the first in a series of five posts intended to consider securities regulatory developments to watch in 2014. Also note the OSC's recent proposal on board gender diversity would require disclosure on whether or not the issuer has adopted director term limits and, if not, disclosure as to why.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
