Board Refreshment: Finding the Right Balance
AUGUST 10, 2018
For the better part of this decade, governance practitioners and investors have paid significant attention to the issue of board refreshment. Their primary concern is that a stale board – one that has not added new members for many years – may become complacent, whereby a lack of independence, new perspectives, and diversity could pose significant risks in relation to long-term performance and effective oversight of management.
The argument that board renewal practices help companies better manage risk and performance is validated by the data. In this article, we find that companies with a balanced board composition relative to director tenure tend to show better financial results and have a lower risk profile compared to their peers. At the same time, companies whose directors’ tenure is heavily concentrated (whether mostly short-tenured or mostly long-tenured) exhibit poorer performance and have a higher risk profile. Therefore, as an extension beyond practicing basic board refreshment, companies may gain significant benefits by maintaining a balance of experience and new capacity on the board.