Boardrooms Remain Old School
Louis A. Simpson epitomizes the graying of U.S. corporate boardrooms.
He will soon join the board of Chesapeake Energy Corp. at the ripe young age of 74. The former Geico Corp. president and chief executive of capital operations can serve until he turns 80, the mandatory retirement age for directors of the natural-gas producer.
While most boards today force members to retire at 72, 19% of the biggest businesses with board age limits now set them at 75 or older—up from 8% in 2005 and 1% in 2000, according to a recent study by recruiters Spencer Stuart.
The number of boards with elderly members likely will grow, partly because businesses fear “they won’t be able to recruit as many experienced directors,” says Julie Daum, co-leader of the search firm’s North American board practice.
The higher retirement ages are sparking criticism, however. “It is a troubling trend because it may encourage the tenure of long-term directors who have lost their outside perspective,” contends William Patterson, executive director of CtW Investment Group, an arm of labor federation Change to Win. “Entrenched board members make it harder to bring in fresh oversight,” he says.
The Spencer Stuart study, released in late 2010, reported the smallest number of independent directors picked for companies in the Standard & Poor’s 500-stock index for any year since 2001. Many boards, wary of tapping untested newcomers during the downturn, “held on to existing directors by increasing or waiving retirement ages,” Ms. Daum explains.
Businesses lifting board age limits also cite the reduced ranks of chief executives taking outside directorships. “It has gotten very complicated to be a board member,” because a directorship is a “serious responsibility,” says Myron “Mike” E. Ullman, CEO of J.C. Penney Co. and a Starbucks Corp. director. For now, he won’t accept another public-company seat. Penney raised directors’ retirement age to 74 from 72 in February 2009 so the retailer could better compete for talent, Mr. Ullman continues.
At the same time, retired corporate leaders “who stay actively engaged are among the best board members,” and so companies want them to serve longer than 70, says William W. George, a Harvard business school professor and retired chief of Medtronic Inc. “Seventy is the new 50,” quips the 68-year-old director of ExxonMobil Corp. and Goldman Sachs Group Inc.
Board members at Goldman increased the retirement age by three years to 75 in December 2009. The move helped retain John H. Bryan, the presiding independent director who “adds wisdom and maturity to the board,” someone familiar with the situation says.
Mr. Bryan, a retired CEO of Sara Lee Corp., previously got a one-year waiver from Goldman Sachs after reaching 72 in October 2008. A Goldman Sachs spokesman says he declined to comment.
A similar desire to keep a key board player persuaded UAL Corp. to boost mandatory retirement to 75 from 73 in 2009. “We didn’t want to lose the services of Jim O’ Connor,” recalls Robert S. “Steve” Miller, a director.
Mr. O’Connor, a retired head of Unicom Corp., joined the airline’s board in 1984 and runs the nominating and corporate-governance committee of the recently renamed United Continental Holdings Inc. He’ll turn 74 on March 5. United Continental declined to comment.
At Chesapeake, the board embraced its mandatory retirement age in 2003—a time when four of seven members already were past 70. “People are staying healthier and engaged in business at later ages,” observes Marc Rome, vice president for corporate governance.
Half of the Chesapeake board will be over 65 upon Mr. Simpson’s June 10 arrival as its oldest new member.
But the octogenarian age limit bothers CtW’s Mr. Patterson. It “becomes an invitation for directors to hang around when several need to step down” at a company like Chesapeake with a poor governance record, he says. “These directors feel very protected in their roles, and so they don’t heed shareholder criticisms of their governance.”
Indeed, two Chesapeake directors encountered strong reelection opposition last year but were retained anyway. The company had ignored a successful but nonbinding 2009 shareholder resolution favoring annual election of board members, citing the natural-gas industry’s volatility. The three-year terms for directors make it hard for outsiders to push for change.
The board “has worked to improve our corporate governance,” Mr. Rome replies.
Investor unhappiness over too many older directors spurred a short-lived proxy fight at Occidental Petroleum Corp. last year. Directors raised mandatory retirement to 75 from 72 in 2004, but didn’t enforce it, according to a spokesman for the oil and gas concern.
Two prominent activists—Relational Investors LLC and the California State Teachers’ Retirement System—launched a contest partly because Occidental failed to announce a CEO succession plan and instead waived the retirement-age rule for CEO Ray Irani and two fellow directors at last spring’s annual meeting. He avoided the fight by agreeing to step down this May. The 76-year-old executive remains chairman until the end of 2014. Occidental no longer intends to grant retirement waivers, the spokesman adds.
Certain boards assure fresh faces by focusing on tenure as well as birthdays. Walt Disney Co. board members, for instance, must exit after serving 15 years or hitting 74. “A long-time director becomes vested in the existing company strategy and has trouble adjusting to necessary strategic changes,” suggests Gary Wilson. He left Disney’s board in 2006 after 21 years and previously offering to quit.
Governance experts see rigorous yearly evaluations of individual directors as a better way to replace poor performers. The practice remains rare, however. “It is very difficult to tell someone you have outgrown your usefulness,” notes Mr. Miller, chairman of American International Group Inc.
Source: Wall Street Journal
Author: Joann Lublin
Date: February 28, 2011