Not Going Anywhere

Directors are getting older and holding their seats longer. Fewer than 1 percent face term limits | You can argue that entrenched boards make companies sclerotic and averse to change”

Carol Hymowitz and Jeff Green


Michael Jeffries’s penchant for having the male crew on Abercrombie & Fitch’s corporate jet wear the retailer’s boxer briefs, flip-flops, and cologne certainly hasn’t hurt the chief executive officer’s standing with his board. Directors awarded Jeffries total compensation of $48 million in 2011. Last year, when Abercrombie lost a third of its market value as shoppers grew tired of its trendy fashions, Jeffries was paid $8.2 million. That’s not exactly the slap one might think. Under the terms of the CEO’s pay package, the board wasn’t allowed to give him lucrative stock options because shareholder value had decreased. Yet the directors increased all other aspects of his compensation where they had discretion to act. Plus, the board, including four outside directors who are 68 or older and have served for close to a decade or longer, agreed to pay Jeffries $107 million should it decide to replace him.

Investment advisory company GMI Ratings says Abercrombie’s nine-member board — which has ignored repeated advisory votes by a majority of its investors against its pay policies — is so entrenched that it treats Jeffries more like a king than a CEO. Yet the retailer is hardly the only company with long-tenured directors who appear closely aligned with top managers. At companies in the Standard & Poor’s 500-stock index, 64 percent of directors have served 10 to 15 years, and an additional 5 percent have served more than 15 years, according to executive recruiter Spencer Stuart. “What you want from directors is for them to really push the CEO for answers and, just by human nature, that gets harder the longer they’re on a board,” says GMI founder Nell Minow. “For every argument you can make about continuity and depth of understanding, you can argue that entrenched boards make companies sclerotic and averse to change.”

Board turnover at S&P 500 companies was the lowest in a decade last year, with 291 of 5,184 director seats changing hands. That’s down from 401 seats rolling over in 2002. At current turnover rates, the typical U.S. company gets about one shot every two years to recruit a director with knowledge of global business, social media, digitization, and other seismic changes facing CEOs.

Just 17 companies set term limits for directors last year, none shorter than 10 years, down from 19 in 2011, according to Spencer Stuart. At the same time, the number of boards with a mandatory retirement age has fallen to 73 percent from 79 percent in the last five years. Where there’s a retirement age, it now exceeds age 72 at 85 percent of boards.

Directors have their reasons for wanting to stick around. The average S&P 500 director earned $242,385 in pay and other compensation last year, up 15 percent in the last five years, to attend about eight meetings a year, Spencer Stuart found. Some veteran directors command far more: Credit-card payment processor Fidelity National Information Services paid 68-year-old director William Foley II $9.5 million in cash last year as part of $10.4 million in total compensation — partly in exchange for his agreement to run for reelection for another three-year term.

Yet the longer a director serves, the less effective he or she is at reviewing a company’s strategy and other oversight duties, says Jim Westphal, a professor at the University of Michigan’s Stephen M. Ross School of Business. Governance advocates say longtime directors are more likely to be out of touch with technology, regulatory changes, and other important issues. “As strategic needs change, you need to refresh the experience profile of the board,” says Westphal.

Hedge fund Elliott Management, Hess’s second-largest shareholder, waged a four-month proxy battle with the energy company in part over worries that the long tenure of its board had contributed to years of poor financial performance. Before reaching an agreement on May 16 that will seat three of Elliott’s director nominees, Hess had the 10th-oldest board in the S&P 500, with an average age of 69.2, according to Bloomberg data. After the truce, 9 of Hess’s 14 directors will be new, cutting the average tenure from more than 13 years to just four. “Boards with long tenures can find it difficult to self-correct,” says John Pike, a senior portfolio manager at Elliott. “There can be a tendency toward defensiveness rather than recognition that the status quo isn’t working.” In a statement, Hess CEO John Hess says the company is “pleased to reach an agreement that we believe is in the best interests of Hess shareholders.”

GMI researchers say Abercrombie is one of more than 700 boards it considers “entrenched” because of long-tenured or aged members. In a 2012 vote on employee compensation, 76 percent of investors voted against Abercrombie’s plan. A year earlier, a majority of investors backed requiring the entire board to stand for election each year. The votes weren’t binding, and the board didn’t adopt either proposal. Abercrombie declined comment.

Some companies have benefited from a board filled with seasoned directors. Berkshire Hathaway’s 13-member board includes five directors who’ve served for at least 15 years each. Those include Warren Buffett, 82, who’s been chairman for 43 years, and Vice Chairman Charles Munger, 89, who’s served for 35. The company produced shareholder returns of 77 percent from 2000 to 2010, vs. a negative 9.1 percent return for the S&P 500 index. Still, Berkshire in recent years has been adding directors and now has an almost equal mix of older and younger board members.

Coca-Cola’s board until March included eight directors with tenure of at least 16 years. Its two oldest directors, Donald Keough, 86, and James Williams, 80, who’d served a combined 55 years, didn’t stand for reelection, and Coke added Helene Gayle, 57, who as CEO of the nonprofit Care USA has experience with operations in developing countries. “As with most companies, our board is naturally evolving,” the beverage giant said in a statement. Coke still has eight directors, half its board, who are in their 70s. Three — James Robinson III, Donald McHenry, and Herbert Allen Jr. — have each served for more than 30 years; two others have sat on the board for more than 20.

The number of long-serving and older directors is likely to grow as more companies limit their CEOs to one outside directorship, if any, and boards rely more on retired chief executives. That’s positive news for veterans who argue that experience trumps exposure to the latest ideas and trends. “Retired CEOs who’ve been through several recessions and have seen everything possible happen in the financial markets have wisdom that’s a lot more important than if they’re on Twitter,” says Douglas Conant, retired chief of Campbell Soup and now a director at Avon Products and AmerisourceBergen.

But tenure that spans decades also means fewer seats can open up for women (currently 17 percent of directors), minorities (15 percent), and others outside the white-male circles that traditionally populate corporate boards. And that kind of management inbreeding can have consequences. Notes Michael Pachter, managing director for equity research at Wedbush Securities in Los Angeles: “If they’re all just pals, it’s a vicious cycle of positive reinforcement.”

The bottom line Only 291 of 5,184 board seats changed hands in 2012. Such stasis may lessen directors’ oversight of CEOs.


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