Warren Buffett. Picture: REUTERS
Warren Buffett. Picture: REUTERS

US BOARDROOMS are looking greyer than ever. More retired executives are being offered directorships, mandatory retirement ages are rising, and directors are staying on longer.

It is a trend that has some investors, particularly state pension funds, increasingly concerned. They say directors who stay on a board a long time can get too cozy with management and lose their independence. It also means that the clubby domination of boardrooms by older, mainly white, men can continue, with fewer opportunities for women and minorities to obtain directorships.

Shareholders should "make the case for director refreshment, and vote against the reappointment of directors at stagnant boards", said Anne Simpson, corporate governance director of the largest US public pension fund, California Public Employees Retirement System.

Ms Simpson said many US boards now resemble a description given by governance pioneer Sir Derek Higgs, who said the boardroom was the domain of the "male, pale and stale". The Council of Institutional Investors, whose members include many state pension funds, endowments and some other large asset managers, adopted a new policy in September that could make it harder for longer-serving directors to be considered "independent". This is an important definition as boards need independent members to lead committees deciding on executive compensation, monitor auditing, and set board policy in critical areas.

The policy could prompt more votes against longer-serving directors who are up for re-election in the 2014 proxy season.

Boards are doing too little to bring in fresh voices, says New York City’s public pension funds head of corporate governance Michael Garland. "It’s a board responsibility to refresh itself," Mr Garland said.

The Council of Institutional Investors, though, is not setting strict guidelines on director tenure or mandatory retirement ages. Past attempts by some activist shareholders to adopt formal term limits for directors have failed to win much support from shareholders.

This is not surprising, given that some of the world’s most legendary business leaders are running massive companies into their 80s — in many cases they are not only active on their boards but often chair them. Among them are investor Warren Buffett, 83, Hong Kong’s most famous businessman Li Ka-shing, 85, and media tycoon Rupert Murdoch, 82.

Instead, some funds are going to use the Council of Institutional Investors framework to vote against long-serving directors provided they are not perceived to be adding value, said Ms Simpson. Mr Garland and Ms Simpson declined to cite specific boards they plan to target.

Institutional investors and pension funds are holding behind-the-scenes discussions with companies about board tenure, said fund group TIAA-CREF senior director of corporate governance Stephen Brown.

Diversity and director tenure are "a focus of the pension funds this year", said Credit Suisse MD and head of contested situations Chris Young. "There happens to be support coalescing around the issue."

Supporters may well face an uphill battle. At a National Association of Corporate Directors’ conference in Washington DC last month, an audience of mainly older men almost all raised their hands when asked if they had been nominated as directors because they knew someone already on the board. They were then asked who was appointed to their boards due to a recruiter.

"Only five people out of 300 put their hands up," recounted Frontier Communications Corporation CE and chairwoman Maggie Wilderotter, also a director at Xerox and Procter & Gamble.

Executive and director search firm Spencer Stuart said in its recent annual study of boards that the average age of directors on the boards of S&P 500 companies has gone up to nearly 63 this year from 60 in 2003 because of rising retirement ages and the increased recruitment of retired executives for board openings.

For the first time, nearly half of the 339 newly elected directors this year had retired from their main employment.

The study said that 88% of the boards that have a mandatory retirement age for directors have set it at 72 or older, against 46% 10 years ago. Twelve boards have an average age of 70 or more, it said.

Also, only 16 S&P 500 boards, or 3% of the total, specify a term limit for directors in their guidelines, while 20% of boards have an average director tenure of 11 or more years.

The lack of term limits means that companies are making slow progress in getting more women and minorities on their boards — the number of women has gone up to 18% of all directors this year from 16% in 2008, with 7% of boards still without a woman director.

Currently, big fund firms typically do not suggest director term limits in their proxy voting guidelines. Executives at several asset managers including T Rowe Price and Vanguard Group said it is too soon to say if their stances on director tenure might change.

One reason for the ageing of boards is that rising obligations for directors put a premium on experience. Restrictions placed upon current top executives outside board commitments also mean that companies are more likely to turn to retired executives.

Still, the push for change is more selective and subtle than in the past. A set of proxy resolutions calling for term limits at big companies such as Pfizer Incorporated and United Technologies Corporation failed to get more than 10% support in 2006 and 2007. A similar measure at General Electric Company this year also made little headway.

Aware of those flops, shareholder activists have avoided calling for term limits and found other ways to make director tenure an issue in proxy contests. At JPMorgan Chase & Company, for instance, the labour pension adviser CtW Investment Group campaigned against several long-serving directors over oversight failures such as the bank’s massive "London Whale" trading losses, citing in part their long terms of service.

The US approach has been much more timid than the corporate governance practices in some European countries where policies suggest directors be tied to management after a certain number of years — nine years at UK companies. The US’s Council of Institutional Investors decided such policies could force out too many qualified directors.

Some worry that the council’s policy could bring in too many new directors. Experience has its place, said former General Motors head of corporate governance Greg Lau, now a consultant with executive search firm RSR Partners. Many new directors "come in not knowing the company nor the industry and it takes them a longer tenure to get to know everything", he said.