Board Refreshment—When Is It Time? How/Can It Be Gracefully Managed?
A few columns ago, I wrote about how directors know when it’s time for them to resign. Thanks for your many insightful comments, including the question, “How do you know when to refresh a board, especially when there are no term limits, renewal limits, or age guidelines?”
Let’s look at two situations when a governance committee, board chair, or chair and CEO should address board refreshment.
The first example is the easiest. Refreshment is needed due to a significant change to the company’s business… an acquisition, a divestiture, a merger, new technology, etc. For example, a board I served on divested a key business because a technology advance was going to make the business less profitable and ultimately obsolete. The director who had experience in this industry was nicely asked to leave the board, and consequently retained a close relationship with fellow directors and the C-suite.
The second example includes emotionally explosive situations. Interestingly, often the director(s) in question know in their gut that they should resign. Here are just a few examples when a director:
Needs to retire, but hasn’t faced this reality
Is creating unnecessary conflict, hurting board dynamics
Has mentally moved on and is “phoning it in”
In all of these cases, there’s usually a key sign. Side conversations between directors, chair, and CEO about a fellow director’s involvement. Such conversations begin with a tentative comment: ”Have you noticed that Director doesn’t, hasn’t, or isn’t____ (fill in the blank)?”
Other signs that it’s time for refreshment:
The member hasn’t made a comment or asked a question for several meetings in a row
The member is clearly impatient with discourse
The member always has the right answer and expects it to be followed
The member is distracted, distant, uninvolved in the conversation, and checking pc/phone, sending emails. (Excluding emergencies which should be shared as a courtesy at start of meeting)
The member has trouble staying on topic and doesn’t add value to conversation.
Once the governance committee, chair, or board chair and CEO decides it’s time to refresh, what’s the best path? How can the board bring in new perspectives without losing valuable insights about company culture or impacting great board dynamics?
Companies and boards want every director to always be a brand champion, even when no longer part of the board. It’s critical in the refreshment process that board actions demonstrate respect for the person as well as for their contributions. Appropriate thank you recognition (dinners, official thank you certificates signed by the board, etc.) is essential. A useful guide is to practice what Mom taught you about good manners.
Board Skills Matrix & Business Assessment
An excellent governance foundation is, of course, built on the board skills matrix. An enhanced practice is to supplement the matrix with an annual business assessment. It includes key components of the strategic plan, such as company growth trajectory and 3-5 year goals. If COIVD-19 taught us anything, it’s to be prepared for the unexpected. Consequently, this business assessment should also incorporate comparisons of the previous five years vs. the next 3-5 years on items such as:
Business/market conditions—eg. mergers and acquisitions opportunities
Relevance of product or service to consumers/customer
New and evolving consumer or customer needs
Viability of base company business
Human capital—availability, changing needs, changing profiles (diversity)
Availability of capital
Environment and community
The combination of a board skills matrix and business assessment enables the governance committee to develop a board spec that objectively addresses the type of board skills and members the company needs or will shortly need. When these tools are part of an annual board refreshment process, decisions about individual directors become less emotional, for both directors and the entire board. These two tools also provide objective rationale for when it’s time to request a resignation.
The Dueling Dialogue of Term Limits vs. Renewal Limits
Board term limits raise a multitude of questions. How long should they be? Is three years the right number? Is five years too long in today’s rapidly changing business environment? What if it’s abundantly clear after two meetings (or fewer) that the new director is not a fit? How can renewals add objectivity to the refreshment process? What expectations must be set for directors at the start of their terms? What are the unintended consequences of term limits?
The three year term—should it be longer?
On average, it takes a director 18 months (six meetings) to hit their stride. Thus a company has the full benefit from director for only another 18 months. That raises the question of a five year term. Or a three year and a one-time, two year renewal. My private company experience is for board members to begin with a 3-5 year term (I lean to five), with terms renewed each year. In addition, the entire board has individual and peer reviews every 18 to 24 months as a check to ensure productive board dynamics that enhance C-suite performance.
Renewals—should there be a limit?
Sure, you can do term renewals, but how many renewals? A good practice is to renew twice, then do an updated skills assessment combined with the above mentioned business assessment. It’s highly unlikely that the skills of the director who was brought onto a board 6-10-years prior will still fit the strategic needs of the company in 13-15 years.
In the situation of staggered terms and renewals, how contemporary, how relevant will a director’s experience and expertise be to the ever evolving, living, breathing strategic plan. If a plan is a one and done and reviewed once a year, then it’s not a real guide to business growth. But, that’s a different column!!
The age old question—should there be a mandatory retirement age?
One of my favorite board colleagues is 80. You would never know his age. He thinks, acts, looks and, most important, has the energy of many 40 year olds I know!
Rather than set a retirement age, especially for independent directors, my experience suggests that retirement be based on the member’s contributions and behavior. If a departure is clearly required, a gentle discussion between the director and a trusted fellow director, chair, or CEO is the best solution. If, however, the director is also an owner and it’s pretty clear they need to go, an independent board review by a neutral party who is not a friend, colleague, or long time supplier of any board member or owner, can be invaluable. But that’s yet another column.
Lynn Clarke has been on more than a dozen private middle-market boards. She is currently chair of the board of Nielsen-Massey Flavorings, governance chair for Abarta Coca-Cola Beverages and Vollrath Manufacturing, and a director on several other boards. She is also managing partner for The Feel Good Lab, a young company in test with CVS Health & Target Corp. and working with Jelly Belly Sparkling Waters to further build its beloved brand.
Lynn Clarke is lead independent director for Vollrath Manufacturing and serves on the boards of A. Duie Pyle, Basic American Foods, Diana’s Bananas, and the NACD Carolinas Chapter. She also is the operating partner for Jelly Belly Sparkling Water and was the 2021 NACD Private Company Director of the Year.