Dr. Beatrix Dart is executive director of Initiative for Women in Business at the Rotman School of Management, and the country lead for the 30% Club Canada.
Ekta Mendhi is senior director of Enterprise Transformation at Canadian Imperial Bank of Commerce, and a member of the 30% Club Canada Steering Committee.
They co-chair the Canadian Gender and Good Governance Alliance.
Matt Fullbrook is manager at the Clarkson Centre for Board Effectiveness (CCBE), Rotman School of Management. The CCBE is a member of the alliance.
The business case for diversity on boards is clear – research has shown increased shareholder value, better governance, improved decision making and more innovative approaches to problem solving. As organizations move forward working to see more women represented on boards, Canada’s current board renewal rate of 9 per cent a year makes it clear that we need to rethink renewal strategies.
Canadian boards remain heavily male-dominated, and yes, more than 85 per cent of board members are male, with an average age of 63. The latest report by the Canadian Securities Administrators (CSA), which represents regulators across the country, shows that only 21 per cent of companies reviewed in 2017 had a director term limit. Now, some companies prefer other mechanisms such as regular competency and contribution reviews of their directors to replace their underperforming board directors. While that is a sound approach, and many boards do perform regular self-evaluations, most of them are not prepared to take a tough stand and engage in the necessary action of replacing board directors when the results indicate that it would be time for renewal. And a surprising 43 per cent of reviewed companies have no director term limit and no other mechanism to enforce board renewal.
Whenever a big shift occurs in corporate governance, board renewal seems to be the wildcard. Think back 20 years to when it seemed normal to have large boards with 20 or more directors, while now the average S&P/TSX Composite Index board has fewer than 10 directors. Or the push toward greater independence and audit expertise after the United States instituted the Sarbanes-Oxley Act in 2002 to protect investors from Enron-like accounting frauds. Or more recently the “professionalization” of directorships and the movement toward greater demographic diversity. The pace at which these changes can occur depends directly on how frequently directors leave the board, whether they are replaced and by whom. It is hardly a mystery that if Canada wants to create more diversity of thought – and demographics – on their boards we have two options: renewal or ballooning board sizes.
The obvious choice is to set term limits for board members. There are two kinds of term limits: age limits (i.e. “retirement” age from the board) or tenure limits (number of years on the board).
Term limits based on age alone seem to be leading the way, as they are easy and straightforward to implement. But, as a governance committee chair at a Canadian financial institution recently complained, his board’s age limit of 70 years and its push for younger board members were creating a problem: A new director’s term could be 25 years. With no limit on tenure, he had no mechanism to ensure the regular renewal of young directors. But age limits can also cause boards to lose deeply effective directors because of their age, even if they are relatively new to the board. Most boards with age limits solve the issue by allowing exceptions to the rule.
The move to implement board renewal policies can be awkward and sensitive, especially for long-tenured board members who risk being cycled off simply because of a seemingly arbitrary new rule. It is usually up to the board chair to table the subject with the governance committee, and to then educate the board about the benefits of board renewal in an objective way that doesn’t cause any personal friction with existing board members. Most importantly, it is only painful once: at the point of implementation. For any new board member who joins with full knowledge of the term limits, there is no awkwardness.
However, once a board seat becomes vacant, the challenge sits with the board chair and the governance committee to recruit from outside the “old-boys-network.” There is no shortage of capable and willing diverse candidates, but it takes additional effort to cast the net wider. Many boards are finally searching beyond the traditional profile of the seasoned corporate executive. How many CEOs does a board really need? When boards broaden the terms of their searches and rethink the definition of “merit,” diversity becomes a much more achievable prospect. After all, only one of Canada’s top 100 companies currently has a woman in the CEO position.
As with all the revolutions in corporate governance that have come before, renewal will be at the core of any board’s success in meeting these external expectations. So let’s not wait for more mandatory pressure – term limits benefit the company as well as society.