Corporate Boards Need to Abolish Mandatory Retirement

The resignation under duress of the CEO of Wells Fargo, after being pummeled in a Congressional hearing, raises a fundamental question: how can corporate boards hold management accountable for performance problems? One trendy answer from several governance mavens -- limit the terms of independent directors so they do not become unduly deferential to the CEO.

The most typical limit on independent directors is mandatory retirement at age 72. This is the tenure limit for the Wells Fargo board. It is a significant limit because most directors do not join large company boards until age 60.

The tenure limit for independent directors is even stricter in UK. After serving for 9 years, a director of a UK public company will not be considered independent unless the company makes a special disclosure justifying longer service for that director

However, I believe that these uniform limits on director tenure are counter-productive. By relying on these automatic rules, boards may get stuck with a relatively young director who is not making a significant contribution to managerial oversight. Meanwhile, these many directors with valuable expertise and real independence are forced to leave boards at age 72 or after 9 years.

It doesn't have to be this way. Since we want boards of the highest quality, we should do away with these hard and fast rules. Board must acknowledge the reality that people are leading longer, healthier lives. And they must be willing to do serious individual evaluations of board members and remove individuals who are not pulling their weight.

Most board evaluations focus on the effectiveness of the board as a whole and its committees; very few offer rigorous assessments of the performance of individual directors. Board members are reluctant to challenge their peers on personal qualifications and make enemies for life. Sure, you might be asked to leave if you, say, stop attending board meetings in person, or get in a fight with the other directors. But absent egregious behavior, you won't get removed from a board.

I speak from experience. Over the course of my career, I've served on seven for-profit boards. The vast majority of people I've worked with have been smart, skilled, and competent. But I've worked with a few duds: some who lacked the knowledge necessary to do the job, others who'd become complacent. However, none of these people was ever asked to leave the board.

By contrast, one of the most talented directors I've ever served with-a biotechnology industry veteran who started several successful companies-was recently forced to retire from the board of a medical device company simply because he turned 72. He's still active working with biotech startups. If it were up to me, he'd still be there.

The prime rationale for a mandatory retirement age is to ensure "board refreshment." This stems from a concern that older, long-tenured directors may lose touch with industry developments or may simply be too frail. While these concerns may be valid in a particular case, they are not true across the board. Industry veterans usually maintain a large portion of their networks, and many people stay quite healthy for years after age 72.

The key rationale for a limited term is that directors will become "captured" by management. They will allegedly grow too close to the senior executives they are supposed to oversee, and over time lose their critical perspective. By forcing retirement at the end of nine years, boards ostensibly get rid of entrenched interests.

But my experience is just the opposite. Many long-serving directors are more ready to challenge management proposals than a newcomer to the board. If a merger is proposed, for instance, experienced directors are able to ask tough questions about the terms of the deal. If a CEO's strategy is ineffective, experienced directors are often willing to insist on rethinking the company's approach. In short, the institutional memory and deep insights of long-time directors are critical to a company's success.

And yet, boards face legitimate challenges in determining whether a director is no longer making a meaningful contribution. To do so, companies need to improve their individual assessment process. There could, for instance, be a mechanism by which a lead director or nonexecutive chair engages in informal confidential discussions with board members. In this process, there would be pointed questions about the contributions of individual directors.

Companies could also get creative in how they handle the age issue. While a 72-year-old is not necessarily feeble or doddering, it's reasonable for companies to reserve the right to replace board members who are no longer healthy enough to serve. Boards could, for instance, require members after a certain age to submit a tentative resignation letter, subject to a special evaluation every year to make sure they can still perform their duties well.

There is no question that directors should be removed from a board when they no longer able to do the work. But addressing this issue with robotic term limits and mandatory retirement ages is not the answer. Wells Fargo and other companies need a more customized process that deals with the strengths and weaknesses of individual directors, irrespective of how long they've served.