Investors take aim at ‘male, pale and stale’ U.S. boards

Investors take aim at ‘male, pale and stale’ U.S. boards

5:15pm EST

By Nadia Damouni and Ross Kerber

NEW YORK/BOSTON (Reuters) – American boardrooms are looking grayer than ever. More retired executives are being offered directorships, mandatory retirement ages are rising, and directors are staying on longer. It is a trend that has some investors, particularly state pension funds, increasingly concerned. They say directors who stay on a board a long time can get too cozy with management and lose their independence. It also means that the clubby domination of boardrooms by older, mainly white, men can continue, with fewer opportunities for women and minorities to get directorships.Shareholders should “make the case for director refreshment, and vote against the reappointment of directors at stagnant boards,” said Anne Simpson, corporate governance director of the California Public Employees Retirement System – the largest U.S. public pension fund with $275 billion in assets.

Many U.S. boards, Simpson said, now resemble a description given by the British governance pioneer Sir Derek Higgs who said the boardroom was the domain of the “male, pale and stale.”

The Council of Institutional Investors (CII), whose members include many state pension funds, endowments and some other large asset managers, in September adopted a new policy that could make it harder for longer-serving directors to be considered “independent.” That is an important definition as boards need independent members to lead committees that decide on executive compensation, monitor auditing, and set board policy in other critical areas. The policy could prompt more votes against longer-serving directors who are up for re-election in the 2014 proxy season.

Boards are doing too little to bring in fresh voices, says Michael Garland, head of corporate governance for New York City’s public pension funds. “It’s a board responsibility to refresh itself,” Garland said.

CII though is not setting strict guidelines on director tenure or mandatory retirement ages. Past attempts by some activist shareholders to adopt formal term limits for directors have failed to get much support from shareholders.

This is not surprising given that some of the world’s most legendary business leaders are still running massive companies into their 80s – in many cases they are not only active on their boards but often chair them. Among them are investor Warren Buffett, 83, Hong Kong’s most famous businessman Li Ka-shing, 85, and media tycoon Rupert Murdoch, 82.

Instead, some funds are going to use the CII framework to vote against long-serving directors provided they are not perceived to be adding value, said Simpson. Garland and Simpson declined to cite specific boards they plan to target.

Institutional investors and pension funds are holding behind-the-scenes discussions with companies about the issue of board tenure, said Stephen Brown, senior director of corporate governance at fund group TIAA-CREF.


Diversity and director tenure are “a focus of the pension funds this year. There happens to be support coalescing around the issue,” said Chris Young, a managing director and head of contested situations at Credit Suisse.

They may well face an uphill battle. At a National Association of Corporate Directors’ conference in Washington, D.C. last month, an audience of predominately older men almost all raised their hands when asked if they had been nominated as directors because they knew someone already on the board. They were then asked who was appointed to their boards due to a recruiter. “Only 5 people out of 300 put their hands up,” recounted chief executive and chairman of Frontier Communications Corp (FTR.O: QuoteProfile,ResearchStock Buzz), Maggie Wilderotter, also a director at Xerox (XRX.N: QuoteProfileResearchStock Buzz) and Procter & Gamble(PG.N: QuoteProfileResearchStock Buzz).

Executive and director search firm Spencer Stuart said in its recent annual study of boards, that the average age of directors on the boards of S&P 500 companies has gone up to nearly 63 in 2013 from 60 in 2003 because of rising retirement ages and the increased recruitment of retired executives for board openings. For the first time, nearly half of the 339 newly elected directors this year had retired from their main employment.

It said that 88 percent of the boards that have a mandatory retirement age for directors have set it at 72 or older, against 46 percent 10 years ago. Twelve boards have an average age of 70 or more – including media company CBS Corp (CBS.N: QuoteProfileResearchStock Buzz) (average age 72) and cable company Cablevision Systems Corp (CVC.N: QuoteProfileResearchStock Buzz) (average age 73).

Also, only 16 S&P 500 boards, or 3 percent of the total, specify a term limit for directors in their guidelines, while 20 percent of boards have an average director tenure of 11 or more years. “Investor pressure for board refreshment is growing, most notably in the form of calls to reconsider director independence as it relates to tenure,” said the report from Spencer Stuart, which recruits directors.

The lack of term limits means that companies are making slow progress in getting more women and minorities on their boards – the number of women has gone up to 18 percent of all directors in 2013 from 16 percent in 2008, with 7 percent of boards still without a woman director.

“You still see boards that are all male and if seats don’t turn over faster, that is going to take longer,” said Lee Hanson, a vice chairman for executive recruitment firm Heidrick & Struggles.


Currently, big fund firms typically do not suggest director term limits in their proxy voting guidelines. Executives at several asset managers including T. Rowe Price (TROW.O: QuoteProfileResearchStock Buzz) and Vanguard Group said it is too soon to say if their stances on director tenure might change.

One reason for the aging of boards is that rising obligations for directors put a premium on experience. Restrictions on current top executives outside board commitments also mean that companies are more likely to turn to retired executives.

Still, the push for change is more selective and subtle than in the past. A set of proxy resolutions calling for term limits at big companies like Pfizer Inc (PFE.N: QuoteProfileResearchStock Buzz) and United Technologies Corp (UTX.N: QuoteProfileResearchStock Buzz) failed to get more than 10 percent support in 2006 and 2007. A similar measure at General Electric Co (GE.N: QuoteProfileResearchStock Buzz) this year also made little headway.

Aware of those flops, shareholder activists have avoided calling for term limits and found other ways to make director tenure an issue in proxy contests.

At JPMorgan Chase & Co (JPM.N: QuoteProfileResearchStock Buzz), for instance, the labor pension adviser CtW Investment Group campaigned against several long-serving directors over oversight failures such as the bank’s massive “London Whale” trading losses, citing in part their long lengths of service. Two directors eventually stepped down after getting low vote totals. A third who won only narrow support, James Crown, has been a director of JPMorgan since 2004 and before that was a director of Bank One Corp since 1991. JPMorgan bought Bank One in 2004.

The U.S. approach, though, has been much more timid than the corporate governance practices in some European countries where policies suggest directors be tied to management after a certain number of years – nine years at U.K companies, for instance. CII decided that such policies could force out too many qualified directors.

“We’re not saying that tenure is a limiting factor for effectiveness, we’re saying this is a consideration that needs to be made,” said Glenn Davis, the council’s director of research.

Some worry the CII policy could bring in too many new directors. Experience has its place, said Greg Lau, former head of corporate governance for General Motors Co (GM.N: QuoteProfileResearchStock Buzz) and now a consultant with executive search firm RSR Partners. Many new directors “come in not knowing the company nor the industry and it takes them a longer tenure to get to know everything,” he said.

About bambooinnovator
Kee Koon Boon (“KB”) is the co-founder and director of HERO Investment Management which provides specialized fund management and investment advisory services to the ARCHEA Asia HERO Innovators Fund (, the only Asian SMID-cap tech-focused fund in the industry. KB is an internationally featured investor rooted in the principles of value investing for over a decade as a fund manager and analyst in the Asian capital markets who started his career at a boutique hedge fund in Singapore where he was with the firm since 2002 and was also part of the core investment committee in significantly outperforming the index in the 10-year-plus-old flagship Asian fund. He was also the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. Prior to setting up the H.E.R.O. Innovators Fund, KB was the Chief Investment Officer & CEO of a Singapore Registered Fund Management Company (RFMC) where he is responsible for listed Asian equity investments. KB had taught accounting at the Singapore Management University (SMU) as a faculty member and also pioneered the 15-week course on Accounting Fraud in Asia as an official module at SMU. KB remains grateful and honored to be invited by Singapore’s financial regulator Monetary Authority of Singapore (MAS) to present to their top management team about implementing a world’s first fact-based forward-looking fraud detection framework to bring about benefits for the capital markets in Singapore and for the public and investment community. KB also served the community in sharing his insights in writing articles about value investing and corporate governance in the media that include Business Times, Straits Times, Jakarta Post, Manual of Ideas, Investopedia, TedXWallStreet. He had also presented in top investment, banking and finance conferences in America, Italy, Sydney, Cape Town, HK, China. He has trained CEOs, entrepreneurs, CFOs, management executives in business strategy & business model innovation in Singapore, HK and China.

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