Inside the Boardroom

Are Term Limits

A Sign of A Board’s
Performance Failure?
By David W. Anderson, PhD, ICD.D
The Anderson Governance Group

Directorship is not a lifetime corporate heavenlies, all of which cause directors to

appointment. So how does a director
know when it is time to go?1
Term limits gained prominence as a
means to force director turnover in
response to the clear failure of boards to otherwise
manage their board composition for performance.2
When the convention was that directors stayed on the
board until it suited them to leave, the advent of term
limits seemed like the only means of relief, even if it
served to highlight the moral bankruptcy of boards to
take themselves seriously as a professional body with
consequential responsibilities.
How things have changed! Directors are well
accustomed to governing to a higher standard of
performance, and thus it is perhaps surprising that
there may be a second life for term limits. In schools of
formal director education, the academics look to past
learnings and declare that term limits are indicative
of a failure to manage director performance. I once
thought so too, but I have changed my mind, based
on experience with my clients. To understand why
term limits can actually enhance board performance,
we have to understand how people feel, think and
behave as directors.
What is your “sell by” date?
No one sets out to over-stay their welcome. Some
directors even know it is time to go, but cannot find
it within themselves to admit it; they may fear losing
face, status or supplemental income. There are three
recurring flaws I see in how directors think about
directorship and their place in the pantheon of the
stay longer than they should:
1. “The knowledge and skills that made me a
suitable director last decade are still valid
today.”
Intellectually, most directors know this may
not be true, but emotionally they want to feel
relevant. The suggestion that they are no longer
current can be interpreted as a negative judgment
on both their current and past contributions,
nullifying the good they have done.
2. “I’m a good director because I am a talented
business person.”
While this may be true, the focus is wrong; it is the
needs of the business that matter foremost. Good
director performance is a function of the match
between those business needs and the director’s
talent. Such talent may be less relevant as the
needs of the business evolve, while still being fully
relevant for other businesses.
3. “I am uniquely qualified to contribute or lead;
this board needs me.”
There are times when certain talent or knowledge
of organizational history is required and a given
individual is specially endowed to meet a critical
need, but these moments and people are few.
The risk for directors is in thinking their special
contribution to the board lies within themselves
because they are irreplaceable. The contribution
is the value delivered, and the truth is that there
are others who can play the same role to meet the
needs of the business.

1 Directors are elected annually by shareholders. In practice, elections are not the means boards use to decide who they want on the
board; that decision, taken by the board, is reflected in the nominees put forward by the board to shareholders. Thus, typically, director
service does not end as a consequence of a shareholder vote, but rather as the result of a decision by the board not to nominate a
director to stand for re-election. The focus of this article is on what basis boards make that decision.
2 See Anderson, DW (2007). Building a better board: Choosing directorship by design. ICD Director. 133 (Aug), 20 – 22.

28 | Institute of Corporate Directors

The questions of when and how to retire directors
from boards – to benefit from their value for a period
of time and to have them move on so the board
can benefit from others’ value – are provocative and
sensitive. Why? Because directors hold a certain status
inviting deference, directors are not employees subject
to the discipline of rank and pay, and directors have a
volunteer quality about them in their motivation, both
for their general sense of duty and, in many cases, for
the relatively low or even non-existent pay.
Yet, none of this mitigates the seriousness of the
director’s role, the legitimate expectation that
directors perform with high levels of effectiveness,
and thus the need to have a viable and valid means
to control the process for professionally managing
the “back end” of director tenure (as is typically
done for director recruitment and selection). Such a
professional approach to concluding director tenure
should be undertaken for no less a reason than for the
sake of the board and its mission to oversee and aid
management on behalf of shareholders in the best
interests of the corporation.
How do boards manage director
turnover?
The simple answer is, not very well. I see three general
modes of controlling this “back end” of director tenure:
self-determination, performance evaluation, and term
limits.
Director self-determination. Left to their own
devices, many high performing directors will leave
the board when they believe they are not making
the kind or magnitude of contribution they expect of
themselves. Others will leave because their personal
interests may change over time, or because the people
around them have changed and it is just not enjoyable
enough, or because of frailty of body or mind. Others
seem not to leave! The result is that some directors
remain past the point of providing a minimally
acceptable contribution, either because they want to,
have to, or fear the implication of not being part of the
board anymore.
Performance evaluation. Some boards manage
director turnover based on performance effectiveness.
In its pure form, these boards use a feedback process
to assess directors and make an annual determination
based firmly on that performance assessment whether
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I n s i d e the Boardroom
or not to re-nominate each director. This approach
works well when directors perceive the process as
being valid, fair and respectful, and where the board
has created a performance culture (though it must
be noted that calibrating and interpreting such
performance measurement is difficult). By design, who
stays for another year is dictated by the value each
director brings in light of the needs of the business.
Term limits. Some boards limit their long-term risk
exposure to underperforming directors by setting
an end-date to each director’s term of appointment
(e.g., three to five years). These terms can be limited,
too, generally permitting one or two renewals for a
maximum of two or three terms, thus capping the
total number of years of service. Other boards use age
limits as a variant to achieve some control over length
of service.
In reality, many boards use a combination of these
modes. Few boards today rely solely on each
director’s own discretion as to when it is time to
go. The scrutiny (and self-respect) is just too high.
Some boards do make explicit ties between peer
feedback and re-nomination. Gentle nudging based
on informal perceptions of performance is far more
prevalent, however. Finally, some boards (including
our governance trend-setting banks) use term limits as
both a back stop and a signal that the board’s interest
is in welcoming a wide, dynamic and continually
refreshing base of talent to drive performance.
Using formal evaluation to remove
directors carries risks
When highly consequential decisions such as director
turnover are directly linked to a single process or
criterion, strong motivation may be created to
game the system. When this happens within an
evaluation process, the results lose their utility.
While most participants in the evaluation will still
offer fair assessments of directors, some may alter
their assessment of directors to help create a desired
outcome. This may be done either consciously
or not, and as a means of either protecting (with
more favourable ratings) or hurting (with more
unfavourable ratings) a director. In addition, some
directors may simply refuse to participate in a process
that carries such consequences if it does not seem
legitimate to them.
30 | Institute of Corporate Directors
With the rising demand for broad stakeholder input
to be considered by boards as part of a holistic
evaluation of performance, new opportunities for
misuse would arise if director tenure was directly tied
to these expressions of perspective. While feedback
is welcome and necessary for the board to know how
its stakeholders think – and thus enable the board
to devise ways of addressing those concerns – one
does not want to give power over peoples’ careers
and reputations to stakeholders too distant to discern
individual perspective and contribution.
However, on a practical note, some board chairs
that I have advised have found the task of asking
under-performing directors to leave the board was
made much easier by having in hand the supporting
evidence of peer feedback – a tonic in the face of
an unpleasant task. It makes it clear to the under-
performing director that this assessment is not just
one person’s judgment being brought to bear to a
director’s tenure. That director, though, may well feel
that a simple conversation with the board chair would
have been sufficient; having others brought into the
process may cause embarrassment.
Using board performance feedback as the explicit
means to remove directors can further taint the
perception of the feedback process in the minds of
directors, shifting the emphasis from constructive
improvement to punitive judgment, introducing a
potential conflict of purpose. When so many directors
and investors favour the use of formal director
evaluation as a means of encouraging director
development, it would be unfortunate to spoil this
unmitigated good with a negative perception.
Certainly, the results of a formal performance
evaluation could identify significant under-
performance on the part of a director. But a formal
performance evaluation process should not be the
only way to identify such poor performance. One
would expect the result of performance feedback
to be consistent with the board’s informal sense of
who is performing adequately and who is not. Thus,
the potential loss of the constructive nature of board
feedback may be an unnecessary trade-off. Removing
a director should come as a result of a sensitive,
deliberative decision, not the outcome of a single
formal assessment. It might be more in keeping with
the developmental nature of an evaluation to regard it
as one input to such a decision, and not as the primary
mechanism.
As useful as performance reviews – both formal and
informal – may be, in practical terms their value does
have limits. The pragmatic reality is that only the most
egregious performance issues are addressed with
respect to individual directors, due to the collegial
nature of boards.
How can term limits be good for
performance?
What is different now that could make term limits a
value-generating proposition for boards? Directors
themselves are coming to the table with a different
mindset and expectations as to what they are there
to do.
The hazards of overstaying are evident to many, as
is the recognition that, for many directors, there is a
decreasing marginal benefit contributed to the board
over time, even if performance is acceptable. New
ideas and perspectives are needed in a competitive
world with fast cycle times; new ideas come from
new people with new backgrounds, experiences and
perspectives.
As much as there is a learning curve, there is also a
performance slide – not intentionally, not even based
in outmoded skills, but simply arising from the reality
many long-serving directors have brought their best
ideas and done their part to move the organization
ahead, and now it is time for others to provide their
best thinking and energy.
A known finite tenure can sharpen a director’s focus;
whatever value and contribution he or she wishes to
bring, the time is now. With an indefinite time horizon
(and at some point a sufficiently long term limit will
result in the same thinking), the urgency is lessened;
other things can take priority now. Term limits can
make more salient a director’s sense of service and the
value of its immediacy.
Similarly, term limits can sharpen a board’s focus,
specifically on board succession planning, by
highlighting the necessity of continually developing
the next generation of board leadership to take over.
This gives directors with leadership ambitions a
known timeframe in which succession will occur and
may thus assist retention of high potential directors.
With smaller boards today, each seat has greater
marginal value; performance deemed acceptable
and hence not triggering a performance concern
in a performance evaluation may still be viewed
as less than optimal for the board, considering the
opportunity cost. Understood this way, term limits can
be seen to provide value in two ways: (1) maintaining
high performance by providing a board the means
of topping up talent to keep the board perspective
fresh and vigorous; and (2) allowing for continuous
diversification of the board composition by giving
the directors the chance to nominate people with
a greater range of perspectives on an accelerated
schedule.
In setting term limits, boards need to keep in mind
the reality of how long it takes to learn the nuance
of the business and its value drivers (as distinct from
knowing the role of a director). Consequently, term
limits should not be too short, or boards will miss the
upside of director learning. The key then is to assist
directors to learn this nuance and to monitor the
learning component of performance in the early years
of tenure.
Since the needs of the board and the organization
change over time, a director may be highly effective
under some circumstances, but not others. Therefore,
directors must adopt the understanding that their
tenure is based on relevance, not seniority. Setting
such expectations with directors in the selection
process is essential. Only then will directors not regard
being asked to conclude their board service as a slight
against their honour or past contributions.
Conclusions
On balance, we have seen directors staying too long,
not too short a time.
If a board finds that term limits are necessary to
remove poor or underperforming directors, it is
a sign of a performance failure of the board to
optimally manage its composition. Nevertheless,
in my view, even with that concern, such a board
should be praised for instituting term limits, as this
action recognizes the need for a tool to refresh its
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I n s i d e the Boardroom
composition and demonstrates that it has found a
means for achieving such.
If a board is truly able to manage its composition
solely through rigorous performance assessment,
acting decisively on this basis to both nurture and
prune its talent while maintaining an effective culture,
then it should be praised for its business dedication
and psychological maturity. Creating such fine-
tuned performance and the unique chemistry that
supports it is rare; maintaining it is rarer still. A caution:
paradoxically, such boards may slide into complacency
and thus find it hard to notice when such finely-tuned
performance slips.
Term limits are not a term guarantee. Term limits
are best regarded as a ceiling, not a floor. The
consequence of performance failings by a director
– either chronic or acute – should be departure from
the board at the time such a judgment is reached,
before the current term expires.
Thus both term limits and performance standards
may be a powerful combination for most boards. It is
a measure of just how much directorship has changed
that term limits are not needed as the only tool to
force turnover, but welcomed as an integrated means
to cultivate a performance-driven board.
It must be noted that some directors continue to learn
and develop skills and understanding and are capable
of bringing significant value beyond even generous
term limits. This fact does not outweigh the positive
potential of refreshing the board composition as
suggested here.
To sustain a constructive focus on performance will
require the full cooperation of directors whose service
boards require. Boards must learn to assist directors
to depart at the appropriate time with the board’s
gratitude and their dignity intact. Stepping down
from a board position should not be harmful to the
individual or disruptive to the board.
Recommendations
First and foremost, directors should take personal
responsibility for their performance and make
the choice to step down from a committee or the
32 | Institute of Corporate Directors
board if they feel its work is no longer motivating
or they are no longer adding clear value to the
enterprise.
Boards should develop a planned approach
to director composition on the board and its
committees, based on directors’ performance
relative to specific objectives or targeted
competencies. Such an approach helps ensure
that the interests and needs of the board and
its committees are the prominent factors in
determining who should serve on the board and/
or a committee and for how long.
Given the challenges of relying solely on
directorship performance as a means of managing
board or committee membership, setting a
maximum term may also be appropriate.
Expectations should be set at that time about
the factors that will govern the director’s tenure.
The board should reinforce the performance
mindset of directors by reminding them that their
stewardship on the board is for a reason and that
the organization’s needs are the primary criteria
for board membership.
Governance committees with a mandate to help
ensure the board’s effectiveness would be the
appropriate body, together with the board chair,
to coordinate committee and board succession
planning. This approach would be applicable
not only to membership on the governance
committee, but also on other committees and on
the board itself.
It is important for the chair of the board and
the chair of the governance committee to work
cooperatively on these matters to ensure that
consistent messages about tenure are delivered
to directors.
With the long-term risk of declining performance
mitigated by the term limit, the emphasis should
switch to developing a value-enhancing board.
Since it takes time for a director to become fully
conversant in a field of expertise, accompany
the term limit with a tailored orientation and
subsequent development plan.
Mr. Anderson is the President of The Anderson
Governance Group (www.taggra.com). He can be
reached at (416) 815-1212 and david.anderson@
taggra.com