Board directors: balancing age and experience in corporate governance
Should company boards prioritise experience or youthful innovation? New research explores the impact of director age on corporate governance
In the corporate world, the board of directors plays a crucial role in guiding and overseeing company management. However, the ideal composition of these boards, particularly concerning the age of directors, remains a topic of debate. Are older directors, with their wealth of experience, more effective, or does their age hinder their performance?
Research suggests that experience often correlates with improved decision-making and strategic oversight. Directors who have weathered multiple economic cycles bring valuable insights that can help navigate complex business environments. However, age can also bring cognitive decline, potentially impacting a director’s effectiveness. The key challenge is balancing the benefits of experience with the potential drawbacks of aging.
According to a study co-authored by Ronald W. Masulis, a Scientia Professor in the School of Banking and Finance at UNSW Business School, the impact of age on director performance is nuanced. The study, Directors: Older and Wiser, or Too Old to Govern? highlights the advantages and disadvantages of older directors in governance roles. The research, co-authored with Cong Wang, Presidential Chair Professor in the School of Management and Economics, The Chinese University of Hong Kong (CUHK-Shenzhen), Fei Xie, Chaplin Tyler Professor of Finance at the University of Delaware, and Shuran Zhang, Assistant Professor in the School of Accounting and Finance at Hong Kong Polytechnic University, observes that older directors tend to have a wealth of knowledge and a broad perspective shaped by years of experience. However, the research paper also cautions that age can bring about cognitive decline and resistance to new ideas.
“The past two decades have witnessed dramatic changes to the boards of directors of U.S. public corporations,” said Professor Masulis. “Several recent governance reforms (such as the 2002 Sarbanes-Oxley Act, the revised 2003 NYSE/Nasdaq listing rules, and the 2010 Dodd-Frank Act) combined with a rise in shareholder activism have enhanced director qualifications and independence and made boards more accountable. These regulatory changes have significantly increased the responsibilities and liabilities of outside directors,” he said.
Many firms have also placed limits on how many boards a director can sit on, and Professor Masulis said this changing environment has reduced the ability and incentives of active senior corporate executives to serve on outside boards. Faced with this reduced supply of qualified independent directors and the increased demand for them, he said firms are increasingly relying on older director candidates.
As a result, boards of U.S. public corporations have become notably older in age in more recent years. For example, over the period of 1998 to 2014, the median age of independent directors at large US firms rose from 60 to 64, and the percentage of firms with a majority of independent directors age 65 or above nearly doubled from 26 per cent to 50 per cent.
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Benefits and drawbacks of older directors
“In our paper, we investigate this boardroom aging phenomenon and examine how it affects boards’ effectiveness in firm decision-making and shareholder value creation,” said Professor Masulis, who defined an independent director as an “older independent director” if they are at least 65 years old.
On the positive side, the research found that older directors often possess a deep understanding of the industry and a broad network of valuable contacts. This experience can translate into better strategic decisions and enhanced oversight. For example, one of the study’s findings is that older directors are less likely to make hasty decisions based on short-term market pressures. They tend to focus on long-term value creation, drawing from a broader perspective shaped by years of experience.
Conversely, cognitive decline associated with aging can affect decision-making processes. The study points out that older directors may be slower to adapt to new technologies and innovative business models. This reluctance can hinder a company’s competitiveness in a rapidly evolving market. The research also suggests older directors can struggle with fast-paced changes in technology and business practices, potentially leading to a lag in board responsiveness.
“We found that older independent directors exhibit poorer board attendance records and are less likely to serve as a member or chair of important board committees,” said Professor Masulis. “They also display monitoring deficiencies and weaken board oversight in executive compensation, financial reporting, payout policies, acquisitions, and CEO retention decisions.
Furthermore, firms with a greater fraction of older independent directors exhibit worse performance, which is not driven by poorly performing firms choosing to appoint more older independent directors. “Investors appear to recognise this and react negatively to older independent director appointments and to raising directors’ mandatory retirement ages. The negative performance effect can sometimes be mitigated or reversed when firms have stronger advisory needs or older independent directors provide particularly valuable experience,” Professor Masulis added.
Balancing age and innovation
To address the potential downsides of aging directors, companies can adopt several strategies. One approach is to ensure a diverse board composition that includes both experienced older directors and younger members who bring fresh perspectives and tech-expertise. This blend can foster an environment where experience and innovation coexist, driving better overall governance. The research suggests that a mixed-age board can leverage the strengths of both experience and innovation, leading to more balanced decision-making.
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Another strategy is implementing mandatory retirement ages or term limits for directors. These policies can help rejuvenate the board and ensure that new ideas continuously flow into the governance process. However, such measures should be balanced with the need to retain valuable director experience. The study notes that term limits and retirement policies can bring fresh perspectives, but companies must be careful not to lose the valuable insights that seasoned directors provide.
Key takeaways for businesses
For businesses seeking to optimise their board composition, several practical takeaways emerge from the research:
- Value experience but encourage adaptability: While older directors bring valuable experience, it’s crucial to encourage continuous learning and adaptability to new technologies and market trends. The study suggests that ongoing education and exposure to new ideas can help older directors stay relevant and effective.
- Promote board diversity: A mix of ages, backgrounds, and expertise on the board can enhance decision-making and strategic oversight. The research underscores the importance of diverse boards that are better equipped to handle a wide range of challenges and opportunities.
- Implement age limits thoughtfully: Consider term limits or mandatory retirement ages to refresh the board while retaining critical experience and knowledge. The study recommends balanced term limits to ensure a board remains dynamic without losing the depth of experience that older directors bring.
- Focus on long-term value creation: Encourage directors to prioritise long-term strategic goals over short-term market pressures, leveraging the wisdom and perspective that come with age. The research concludes that directors who focus on long-term value can guide the company through short-term volatility, ensuring sustainable growth.
By thoughtfully addressing the age-experience balance, the research suggests companies can enhance their governance and better navigate the complexities of today’s business environment. “As the debate over director age limits continues in the news media and among activist shareholders and regulators, our findings on the costs and benefits associated with older independent directors can provide important and timely policy guidance,” said Professor Masulis.
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“For companies considering lifting or waiving mandatory director retirement age requirements so as to lower the burden of recruiting and retaining experienced independent directors, our evidence should give them pause.”
Similarly, while recent corporate governance reforms and the rise in shareholder activism have made boards (and especially independent directors), more accountable for managerial decisions and firm performance, they may also have created the unintended consequence of shrinking the supply of potential independent directors who are younger active executives.
“This result has led firms to tap deeper into the pool of older director candidates, which our analysis shows can undermine the very objectives that corporate governance reforms seek to accomplish,” Professor Masulis concluded.