Hankering for status drives non-executive directors to outstay effectiveness

Long-serving non-executive directors (NEDs) who can’t wean themselves off the social status attached to belonging to the corporate board, are failing shareholders and damaging the companies they are meant to serve, new research shows.

Board members who exceed their tenure are putting the identity and self-worth they gain from being a director ahead of their duty to shareholders, compromising board renewal and its financial and strategic performance.

Non-executive directors interviewed for the study acknowledged the problem of colleagues staying ‘too long’ and said prolonged tenures can create governance concerns for boards and shareholders, according to the research published in Accounting Forum.

Through in-depth interviews with experienced non-executive directors who have served on 68 boards in Australia, across public companies, government-owned organizations, private companies and mutual banks, the study set out to explore the motives for some non-executive directors to serve on boards beyond recommended tenure limits.

While financial reward and intellectual stimulation undoubtedly played a part in their residency, it was the thought of no longer being able to call themselves a board director – a status that went to the core of how they defined themselves- that compelled them to stay.  

What the researchers say: “Our findings show that for some NEDs, their identity as a board director is more important to them than acting in the interests of shareholders. When it’s a healthy time to step down they don’t want to relinquish an important part of who they are, so instead they ignore their accountability to shareholders.”

“It’s like another world, where else do you get the respect just because of your role [as a director]?” said one NED interviewed for the study.

“People like to be a director – and like to know that people know that they’re a director,” said another.

Regulators in UK and Australia recommend a limit of between nine and 12 years for non-executive directors to step down and give way to new candidates, and the those interviewed for the study spoke of a maximum tenure of 10 years being ideal.

Nevertheless, the interviewed directors could easily recount knowing board colleagues who had served for 15, 18 and over 20 years.

“Unfortunately, it would be the one director duty that I see directors most breach - that duty to act in the best interests of the board when it comes to their tenure - it’s actually more about keeping their board seat… they just want to stay on the board, they just don’t want to give up their board seat,” said a study participant.

The researchers suggest that a board tenure policy can act as an important safeguard against excessive tenure, and the stale thinking that can ensue.

“Prolonged tenure is a governance concern for corporate boards and exposes the limits of a board’s self-regulation,” the researchers said. “The issue of term limits is important for ensuring that directors are acting in the best interests of shareholders, and a board renewal policy can act as an important defense against directors’ reluctance to leave a board voluntarily.”

So, what? Humans need to have a sense that they are valued - this is what status means to us. Since it is one of the four key motivators of much of our behaviors and even our emotions, it’s not really surprising that NEDs might want to hang onto their positions.

In a hunter-gatherer society, a man or a woman gained status and value as they got older. They were seen as wise, they were a member of the council of elders, they were the keepers of the laws and the judges. Their knowledge and experience were valued.

A human being never loses the need for status, the need to be valued by the community. Unfortunately, in our society, the opportunities to get recognition and status actually decreases as a person gets older. This goes completely against our basic design specs.