Director tenure and contribution to board task performance: A time and contingency perspective

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Abstract

Director tenure is a topic of great interest in the corporate governance debate. Researchers try to assess the effects of tenure on director contribution, board effectiveness and firm performance. Regulators, corporations, and institutional investors advocate for term limits for outside directors to reduce the risks of impaired governance. Despite the burgeoning interest, there is lack of consensus on the mechanisms shaping directors' contributions over time. We argue that next to the ‘loss of independence’ and ‘knowledge acquisition’ hypotheses, respectively predicting a negative and positive effect of tenure on task performance, socio-cognitive and behavioral approaches elucidate the way in which directors' contributions rise and decline with time. Using a multiple case study approach, we document wide variability in directors' contributions at similar levels of tenure. We find this is due to a series of contingencies including whether directors are novice or experienced, the frequency and nature of board interactions, and the relative power of a director. This variability is particularly clear in longer serving directors for whom we find polarizing results: while some grow stale in the saddle, others sustain high levels of contribution despite extreme tenures. The latter finding is at odds with agency-based assumptions and general predictions from the literature. Overall, our study offers a tentative explanation as to why setting an ‘ideal’ tenure for outside directors has proven so difficult and encourages boards and policy makers to consider the influence of director-level features as well as board dynamics in shaping directors' contributions.

Introduction

A large body of corporate governance research strives to identify which attributes and characteristics of outside directors enable or hinder board task performance (Johnson et al., 2013). Recent developments in the field acknowledge that directors' contributions to task performance changes both with levels of human and social capital (Hillman and Dalziel, 2003) as well as over time; and as such, tenure (e.g., the amount of time served on a board) is likely to impact contributions to board effectiveness (Mooney et al., 2021). One stream of such research emphasizes the relational aspects of increased tenure, arguing that the social bonding unfolding over time between outside directors and top management can jeopardise director independence and impair monitoring efforts (Hwang and Kim, 2009; Minichilli et al., 2009). This perception has influenced a regulatory debate on whether a tenure-limit should apply to outside directors (Huang and Hilary, 2018). Investors and shareholders lobby groups have raised similar concerns with increasing director tenures (Brown et al., 2017; Hillman et al., 2011). The International Shareholder Services (ISS) considers board tenures of more than 9 years to be excessive (ISS, 2015), while the Australian Shareholder Association argues that “after 12 years [on a board], you've been drinking the same Kool-Aid as the executives for a long period of time” (Mitchell, 2015). Fuelled by this debate, many corporations have voluntarily introduced tenure limits along with mandatory retirement ages for outside directors (Hoang et al., 2016). Interestingly, and despite growing research along with heightened attention from practice, there is limited consensus on the effects of long-tenured directors on governance quality.

An alternative view to the former highlights the benefits associated with tenure; time enables directors to acquire valuable firm and industry knowledge enhancing directors' capacity to contribute to task performance (Bonini et al., 2021; Brown et al., 2017; Kor and Sundaramurthy, 2009). However, whether these ‘knowledge gains’ offset any costs induced through reduced independence remains a contentious issue in the governance debate. Conflicting empirical findings mirrors these two opposing views: it takes time for outside directors to develop the knowledge required to contribute meaningfully, yet too much time on a board may harm director independence. When combined, these dual perspectives suggest a non-linear relationship and a trade-off point whereby the value of outside directors' contributions begin to decline (Huang and Hilary, 2018; Veltrop et al., 2015). Although numerous attempts have been made to pinpoint an ‘optimal’ tenure that can balance these two countervailing forces, no consensus has emerged (Johnson et al., 2013).

At a general level, one issue surfacing in assigning an optimal tenure point is that it is designed to suit a large, heterogenous, pool of boards and directors. This limitation is enhanced in empirical studies where tenure is treated as an ‘average’ effect, rather than as an individual-level attribute affecting board task performance (Bonini et al., 2021). As such, comparable tenures for otherwise dissimilar directors are unlikely to have the same meaning (Finkelstein and Mooney, 2003). Similarly, differences in board structure and dynamics may impact directors' contributions to task performance as well as their evolution over time (Bezemer et al., 2014; Pettigrew and McNulty, 1995; Tuggle et al., 2010).

In this study we argue that outside directors' contributions to board task performance not only change across time, but that such change is contingent on factors other than time alone. As such our focus shifts from identifying an ‘optimal’ tenure length, to investigating how individual and board-level factors affect director contributions to board task performance over time. We posit that next to the opposing ‘loss of independence’ and ‘knowledge acquisition’ hypotheses, individual level and inner board-level factors will also shape how directors' contributions to board task performance vary with tenure. Accordingly, we establish two research questions: (1) How do outside directors' contributions to board tasks change over time? And (2) What factors affect director contributions over time?

Our research questions entail an examination of individual directors' characteristics and contributions, boardroom dynamics, and their interplay. We achieve this through a comparative case study approach, involving the boards of five firms operating in the Australian financial services industry. The strength of this approach lies in its ability to draw from multiple perspectives and sources of data, providing richness in unveiling hard-to-access processes and first-hand accounts characterizing directors’ contributions to board task performance in relation to features beyond tenure. By doing so, we address calls for greater research relying on settings and data sources that provide a direct account of what occurs inside the boardroom (McNulty et al., 2013; Hambrick et al., 2008), and generating deeper insights on how directors contribute to board task performance.

Our first finding indicates that outside directors' contributions to board tasks do change with time; nevertheless, they also reveal significant variation at similar levels of tenure due to individual and board level contingencies. First, we find that when a director joins a board, a period of necessary settling-in is required before offering any meaningful contribution. The duration of this period varies widely, with salient differences between novice and experienced directors (Haynes and Hillman, 2010). Moreover, we find that the frequency and nature of board member interactions affect directors’ acquisition of firm-related knowledge, and ultimately, the speed and extent to which a director can contribute to board task performance.

Second, we highlight novel and interesting findings in relation to the contributions of longer serving directors that both complements and extends prior research. In line with the generalised perception that long-tenured directors become ‘stale in the saddle’ (Brown et al., 2017), our analysis identified a subgroup of long-tenured directors who had outstayed their contribution. However, in a departure from traditional agency perspectives, we did not find evidence that social bonds had impaired their ability to remain impartial, rather the data pointed to a decline in the relevancy of these directors' contributions due to a preference for the status quo and attachment to past decisions. A relevant factor in this distinction was the lack of significant shared tenure between management and the longer serving directors in our study, a necessary attribute for social bonding (Bonini et al., 2021). On the other hand, we found a separate subgroup of long-tenured director offering sustained and highly valuable contributions to the boardroom debate both in the form of monitoring and advice giving. These findings tentatively show that longer serving directors are not necessarily hindered in their ability to contribute, rather, as long as they remain motivated and empowered, long-tenured directors can continue to contribute at a high level to board task performance.

Overall, our study highlights the complexity in anticipating a clear relationship between outside director tenure and board task performance. We offer a tentative explanation and rationale for the lack of empirical consensus, especially in relation to the more controversial group of long-tenured directors. Finally, we identify three contingencies that can shape the speed and extent of directors' contributions to board task performance over time: director experience, board member interactions, and directors’ relative power.

These insights have implications for practice and policy, and we caution against a strict ‘one-size-fits-all’ policy regarding director tenure that may over, or under, estimate the value of directors' contributions. Instead, we suggest offering boards some freedom in adapting tenure policies depending on individual circumstances.

Section snippets

Literature review and theoretical development

Corporate governance researchers and regulators show a growing interest in the effects of outside director tenure on board effectiveness and firm value (Huang and Hilary, 2018). Their focus has revolved around qualifying how and why tenure affects directors' ability to contribute, and whether ‘optimal term limits’ minimize any risk of impaired governance associated with longer tenures. However, what the effects of director tenure are on board task performance remain controversial (Johnson et

Research methods and analysis

We employ a comparative case study approach and rely on in-depth hard-to-access data to incorporate multiple perspectives drawn from sources across different organizational and board levels (Eisenhardt, 1989; Yin, 2009). This approach is well suited for our investigation, as it allows observations of similarities and differences amongst directors and boards to be validated through data triangulation. To remove discrepancies related to the operating context, firms were selected from a single

Variability of directors’ contributions at similar levels of tenure

Our preliminary analyses showed that directors' contributions to board tasks evolve with their tenure. Interestingly, we found significant variability in terms of outside directors' contributions at similar levels of tenure indicating that director contribution trajectories were non-uniform. While this pattern was evident across all primary data sources, it was further clarified from our analyses of boardroom discussions. For example, Fig. 2, derived from the board meetings data, summarises the

Discussion

A growing body of governance literature analyses the implications of director tenure on board task performance. Similarly, regulators, investors, and corporations, debate whether tenure limits should be imposed on outside directors and – if so – what an ‘ideal tenure length’ is (Huang and Hilary, 2018). Despite the heightened interest, there is a lack of theoretical and empirical consensus on how directors' length of service impacts contributions (Mooney et al., 2021), and whether long-tenured

Conclusions

Our study shows that board tenure does not exert a constant nor monotonic effect on directors' contributions. Instead, we show that individual trajectories differ significantly and are contingent on individual experiences, board processes and structures. Moreover, we find that lengthy tenure does not necessarily hinder directors' contributions, rather long tenure can strengthen directors’ effectiveness in the boardroom. These findings begin to explain why scholars and practitioners have found

Author statement

Natalie Elms: Conceptualization, Investigation, Methodology.

Amedeo Pugliese: Conceptualization, Supervision.

Natalie Elms ([email protected]) is a lecturer in the Business School at Queensland University of Technology from where she earned a PhD in Corporate Governance. Her research interests include board composition, director motivation and director effectiveness.

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    Natalie Elms ([email protected]) is a lecturer in the Business School at Queensland University of Technology from where she earned a PhD in Corporate Governance. Her research interests include board composition, director motivation and director effectiveness.

    Amedeo Pugliese ([email protected]) is a professor at the Department of Economics and Management at the University of Padua and a visiting professor at the Department of Economics and Business at Universitat Pompeu Fabra. His research interests span across boardroom dynamics, governance mechanisms and financial regulation.

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