When is it Time for a Director to Step Down

Answered By 
Susan Shultz is CEO of the Board Institute and president of SSA Executive Search International.

Too often boards of directors are overloaded with directors who are disruptive, passive, no longer current, or just taking up seats that could be used by more qualified individuals. Unfortunately, a top boardroom challenge is to devise ways to have more frequent director rotations.

On average, a board brings on a new director once every other year, according to Equilar. In 2012, S&P 500 boards elected only 291 directors, the smallest number of new appointees since 2001, Spencer Stuart data shows. Unfortunately, boardroom culture can too often be like that of a club, in which members consider it disgraceful not to be asked to stand for reelection. Board members must recognize that director seats are not an entitlement in perpetuity.

Why is it so important to rotate board membership? First, director seats are few and far between, and need to be used wisely. Shareholders deserve nothing less. A new director can revitalize the board’s effectiveness with new expertise, perspectives and background. This insight can help companies navigate through global expansions, M&A transactions and succession planning issues, among other matters. If boards that think strategically add value, and if directors are recruited to focus on the company’s critical future needs, then shouldn’t qualified new directors be added to boards more frequently? Likewise, directors who have contributed to the company but whose skills have lost relevance should be rotated off of boards regularly.

Ideally, board member retention will be based on merit. According to Spencer Stuart, however, 73% of boards instead rely on age limits, and 4% on term limits, to ask for a director’s resignation. I feel this is an arbitrary means of accomplishing director transitions. For example, George Shultz [not a relation] was rotated off the board of Bechtel at age 70, yet an observer might reasonably think that the former secretary of state could have continued adding value to board meetings. Directors who are meaningfully contributing to strategy and critical
discussions of key governance issues should be retained, regardless of age.

The key to retaining directors based on merit is an objective and actionable evaluation of each director, the committees and the overall board. And the only people who can assess a director effectively are other board members or associates working inside the boardroom.

What are the signs that a director should leave the board? I believe the following signals might indicate a seat rotation is called for:

  • The director’s allegiance is to management and other board members, rather than shareholders. Directorsmay have become dependent on retainer fees or hold so much stock that their objectivity is compromised.
  • The director is overly risk-sensitive. Do compliance concerns overtake the director’s appetite for corporategrowth and innovation? If the threat of lawsuits makes directors too uncomfortable to take risks, regardless of insurance protections, they should step down.
  • The director has lost interest in the business. The board member may have joined the board because a colleague suggested it or because of a relevant skill set. Such a director may no longer find the business interesting, or may no longer have confidence in management. If directors can’t support management, their responsibility is to advocate for leadership changes or resign. Their first responsibility is to ensure the right leadership is in place and has the necessary resources.

Directors who contribute only in their specific area of expertise, and those who are too busy to devote adequate time to board service, may also be good candidates for rotation.

It is understandable when directors rationalize retaining underperforming directors out of loyalty to their colleagues. However, boards can move beyond such practices by more assertively understanding the company’s evolving needs, conducting more rigorous director assessments and regularly identifying suitable boardroom candidates. When a continual director rotation process is established, it validates the board’s recruitment and retention processes. It also helps attract the best overall directors to the table, for the good of all stakeholders.

Susan founded The Board Institute with the sole purpose of helping to build better boards. Taking this mission and coupling it with her deep experience in board management, she has developed the only professional, independent, web based suite of tools to help organizations assess, benchmark and enhance their boards of directors and their committees. Susan also leads OakBridge’s Global Board Practice, dedicated to helping public and private companies build better boards of directors, through our comprehensive director search services. Prior to joining OakBridge, Susan ran her own successful search firm, SSA Executive Search International, Ltd., for 25 years, where she has been recognized as a leading expert in corporate governance. She authored the highly acclaimed The Board Book, Making Your Corporate Board a Strategic Force in your Company’s Success (AMACOM) and has been featured in the New York Times, The Wall Street Journal, Business Week, USA Today, Strategic Finance, CFO Magazine and numerous other media. She has spoken about corporate boards at The Business Roundtable, The Commonwealth Club, the Canadian Chartered Accountants, Montreal, the Financial Executives Int’l Annual Summit, the Economist CFO Forum, Tokyo, Semantic Annual CIO Symposium, various CEO gatherings, and to many other organizations. Before establishing her search firm, Susan had a marketing firm, an import-export company, and was a consultant/media director for many U.S. state and federal political campaigns. She was a columnist and investigative reporter for Phoenix Magazine for 15 years, and has written for numerous other publications. Prior to that, she managed legislation for Rep. William E. Brock in Washington, D. C. Susan received a B.A. in Government and Economics from the University of Arizona and completed all core graduate work in International Affairs and International Economics at George Washington University. Susan currently serves on the board of Amazon Bank, chairs the Phoenix Committee on Foreign Relations, is a member of the Council on Foreign Relations (NYC), Pacific Council on International Policy (Los Angeles), is a director for the School of Global Studies, ASU, and is past President of the Arizona Business Leadership Association. She also served on SBA’s eight-member National Small Business Development Center Advisory Board and numerous other boards.

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