Key Points
- Proxy advisory firms and institutional investors increasingly view tenures over nine years as too long, questioning the independence of directors who have served longer than that.
- Board refreshment is a frequent demand of activists, so companies may find themselves vulnerable to activist campaigns if they have very long-serving directors.
- As boards review their own composition for skills and other attributes, they should explain to investors the value that long-serving directors bring to the board.
- While few U.S. companies have formal tenure limits, age limits are more common but less favored by proxy advisory firms.
U.S. activism remained elevated through the third quarter of 2024, with board refreshment a consistent demand by activists year after year. Central to the activists’ demands for board refreshment is director tenure.
Historically, the proxy advisory firms and institutional investors have acknowledged the value longterm experience can bring to a board and have not pushed for director term limits, opting instead to evaluate director tenure on a case-by-case basis. However, leading proxy advisory firms and many institutional investors are increasingly going public with their views that tenures beyond nine years are generally too long.
This has provided ammunition for activists, who have questioned the value of long-tenured directors: 67% of activist campaigns since 2021 have targeted companies with three or more directors who have served 10 years or more, according to Evercore’s Third Quarter 2024 Quarterly Review. Thus, companies with one or more directors with tenures perceived to be overlong are at an increased risk of falling into the cross hairs of an activist investor, notwithstanding the insight that long-serving directors can contribute.
For further information, please contact:
Elizabeth R. Gonzalez-Sussman, Partner, Skadden
elizabeth.gonzalez-sussman@skadden.com
