In our March Newsletter, we wrote about Board renewal to foster consideration of age diversity – ensuring not all Directors are of the same generation and mindset. In this newsletter we review another renewal topic – Board tenure.
Many Boards do not have a maximum period of time a Director may serve, although some specify a maximum of either three or four three-year terms. (Totalling nine to 12 years.)
When a Director first joins a Board, it can take time for them to become familiar with the company and how it operates, such that they are not contributing at full capacity until a number of years have passed. On the other side of the spectrum, when a Director stays on a Board for a very long time, the Director may become complacent and not fulfil the required level of due diligence in their review of its operations, opportunities and performance.
So what is the optimal Board tenure?
After completing an analysis commissioned by the Australian Financial Review’s BOSS Magazine identifying which tenured ASX 200 CEOs had performed best over a five-year period, we decided to extend the analysis to examine whether Board tenure had an effect on company performance.
The analysis ranked ASX 200 companies over five years based on revenue growth, improvement in operating margin, total shareholder return and corporate governance. We compared this ranking against the average tenure of Directors as at the end of their companies’ last reporting period.
There was no strong correlation between tenure and performance, although we did note a trend where performance improved as average Director tenure increased until a certain point, when it began to decrease. The strongest performance for the companies studied was where the Directors were on average serving their third or fourth terms on the Board (not necessarily in the same role.)
There was a similar though much stronger trend for the length of time a CEO had served on the Board, with six to nine years being the sweet spot for company performance.
For the chair, a trend was difficult to pinpoint, although it appears companies with Chairs who had served on the Board for a minimum of two terms performed better on average.
The average tenure for Non-Executive Directors of the top two hundred companies is just under six years. Therefore, a Director would need to serve a longer than the average term in order to hit the sweet spot noted in the trend.
Long serving CEOs who delivered
As mentioned, our work on Board tenure began after we were commissioned by the AFR’s BOSS Magazine to run an analysis to discover the best performing ASX CEOs who had been in their role for five years or more.
Our top 20 CEOs were:
- Ainsworth Game Technology’s Danny Gladstone
- Magellan Financial Group’s Hamish Douglass
- Sirtex Medical’s Gilman Wong
- Carsales.com’s Greg Roebuck
- Mermaid Marine Australia’s Jeff Weber
- Super Retail Group’s Peter Birtles
- NIB Holding’s Mark Fitzgibbon
- Domino’s Pizza Enterprises’ Don Meij
- ALS’ Greg Kilmister
- CSL’s Brian McNamee
- iiNet’s Michael Malone
- Automotive Holdings Group’s Bronte Howson
- APA Group’s Michael McCormack
- TPG Telecom’s David Teoh
- Westpac’s Gail Kelly
- Coca Cola Amatil’s Terry Davis
- Origin Energy’s Grant King
- AP Eagers’ Martin Ward
- Cardno’s Andrew Buckley
- Monadelphous Group’s Robert Velletri
For those interested in reading BOSS Magazine’s full feature, it is available on the AFR’s site.