What term limits on company directors are missing

Corporate heavyweight John Mullen. Picture: Nikki Davis-Jones

In the space of a week, two fundamentally inconsistent views on the future of corporate governance in Australia have been playing out in these pages.

With the Australian Prudential Regulation Authority proposing hard term limits for non-executive directors to boost board renewal and diversity, corporate heavyweight John Mullen has been highlighting directors’ essential value as a counterweight to management.

While on face value these positions might appear unrelated, they are in direct tension with each other because one is tethered to form, the other to substance. APRA’s discussion paper, released a fortnight ago, proposes a default 10-year tenure limit for non-executive directors of certain regulated entities, notably superannuation funds, insurers and banks. The idea stems from APRA’s recognition of board refreshment as a critical safeguard against groupthink and a lever for ensuring companies remain agile in a dynamic market.

In theory, a 10-year cap on non-executive director tenure would help prevent entrenchment – a state where long-serving directors lose their critical independence and become overly aligned with management.

APRA’s proposal is designed to promote an environment where boards continually evolve as they incorporate the new skills, experiences and innovative approaches to solving emerging challenges that come with appointment of new directors.

Mullen, a seasoned voice in the boardroom, echoes a similar sentiment about the need for genuine board diversity, but his recent commentary embraces a salient caution that diversity should not be reduced to a mere box-ticking exercise.

Instead, it should be about cultivating a board that brings together directors with distinct values, experiences, and perspectives – directors who can critically challenge management and confidently question whether they are making the right decisions.

Qantas chairman John Mullen. Picture: Nikki Davis-Jones

Mullen’s argument is clear: while societal changes have driven many positive reforms, the pendulum may have swung too far in some respects. He argues that directors should not be “radically woke … [or] radically anti-woke” – rather than following what he refers to as the “latest trend”, Mullen points out that directors are obliged to do “what is good for [the] company”, even if that means setting aside personal convictions.

All of this underscores the fact that corporate boards are more than advisory bodies; they are custodians of a company’s institutional memory and strategic continuity. Long-serving directors often possess an intimate understanding of the company’s history, the evolution of its business model and the nuances of its stakeholder relationships – insights that can be crucial during periods of market turbulence or strategic realignment.

Strong, longstanding relationships with key stakeholders, including with manage­ment and investors, regulators and business partners, enhance the board’s ability to navigate complex challenges, foster trust and make informed decisions that align with the company’s long-term success.

A rigid tenure limit runs the real risk of stripping boards of directors whose experience is vital to nuanced decision-making. In an environment where powerful CEOs command considerable influence, the premature and arbitrary removal of seasoned directors could further tip the balance of power, leaving boards less equipped to effectively challenge management.

There is an interesting counterpoint to this debate in the context of the role and importance of “independence” in governance and board composition. Independence (and independents) can inject fresh perspectives, broaden diversity of thought and bring valuable experience from different sectors. A board comprising a sufficient number of independents can mitigate the risks of entrenchment, ensuring directors do not become too aligned with longstanding management teams.

This independence is crucial in preventing boards from passively ceding decision-making authority to dominant executives, particularly in companies where a strong CEO or founder wields significant influence.

There is a countervailing risk that needs to be taken into account. If independent directors are too removed from the company’s long-term interests as a result of having no deep-rooted connection with its history and evolution, they are more likely to make decisions that are technically independent but not necessarily aligned with the company’s best interests.

Some degree of continuity and alignment fostered by longstanding dedication to a company helps ensure that directors act not just with independence, but also with commitment and accountability. In this sense, having “skin in the game” including through tenure and familiarity with the business can be just as important as bringing in new perspectives.

What, then, is the optimal path forward for corporate governance? The answer must be balance. While Australia’s current framework articulates the principles fundamental to good governance, it largely avoids detailed prescription. That flexibility is part of the system’s great strength, and it recognises the value of long-term experience alongside the importance of succession planning and ensuring that boards remain vibrant and responsive to change.

Rather than prescribing strict term limits, perhaps the framework could include an enhanced articulation of the features of tenure, or the circumstances of long tenure which are – or are not – desirable or consistent with the corporate governance principles.

A rebalancing of the principles around independence is also warranted, articulating the benefits of relationships, shareholding and tenure – not just the detriments.

We should keep the focus on outcomes – such as enhanced operational performance, improved strategic oversight and robust shareholder returns – rather than strict prescriptions as to process or structure, and thereby point boards in the direction of a balance between continuity and ­innovation. The focus should not be on arbitrary rules but on ensuring that boards, through a combination of renewal and stability, are best positioned to serve the long-term interests of a company and its shareholders.

Jonathan Wenig is lead partner in Arnold Bloch Leibler’s corporate and M&A practice.