California’s big public pension fund has a message for corporate board members like Lee Raymond, the 77- year-old lead director at JPMorgan Chase & Co.: It’s time to retire.
The $294 billion California Public Employees’ Retirement System is taking aim at older, white men on corporate boards with a proposed policy aimed at adding more women, minorities and gays to key positions at the largest U.S. companies. Raymond, five years older than the bank’s recommended retirement age of 72, exemplifies that group.
“We’ve got board stagnation,” said Anne Simpson, director of corporate governance at Sacramento-based Calpers. “We’re not going to create an opportunity for new members for diversity to progress unless there’s some space.”
The entrenchment of corporate directors in the U.S., where just 3 percent of companies on the Standard and Poor’s 500 Index have term limits for non-executive directors, has become the latest battleground for activist investors seeking to improve shareholder rights. California’s public employee and state teacher pension funds, with almost a half trillion dollars under management, have long been viewed as key allies in such fights because of their size.
Directors’ independence can be compromised after 10 years, and companies should either classify them as nonindependent or provide an annual explanation why, Calpers said in a set of principles released Thursday. Routine discussions about replacing directors would ensure boards have a “necessary mix of skills, diversity and experience,” Calpers said in the document.
“Any time an investor of any kind has an issue with things like this — and Calpers is very credible — companies will pay attention, and then there will be concerns that other investors will also start paying attention, and wonder if they should do something similar,” said Ning Chiu, counsel specializing in corporate governance at Davis Polk & Wardwell LLP in New York.
Hanging On
S&P 500 boards replace about 7 percent of their members annually and the average tenure is 8.5 years, according to Spencer Stuart, an executive search consulting firm. Among those boards, only 3 percent set an explicit term limit for directors and 73 percent have a mandatory retirement age, typically age 72 or older.
Twenty percent of U.S. companies had directors with tenure of at least 12 years, compared with 6 percent at U.K. firms in 2013, according to a February report by State Street Global Advisors, the money-management arm of Boston-based State Street Corp. The U.K. has adopted a policy on a “comply-or-explain basis” that limits a director’s tenure to 9 years, according to the report.
“We also see pretty regularly that retirement ages are not respected,” Calpers’ Simpson said. “Look at JPMorgan.”
Raymond, a former chairman and chief executive officer at Exxon Mobil Corp., has been on the JPMorgan board since 1987 and lead director since 2004. The company’s policy says directors are expected, but not required, to retire at 72. JPMorgan spokesman Andrew Gray declined to comment on his tenure. Raymond didn’t immediately respond to a request for comment.
Pressure has been building for companies to assess the diversity and tenure of their boards, said Dan Siciliano, law professor and director of the Rock Center for Corporate Governance at Stanford University near Palo Alto, California. Board composition has become easier to track, and high-profile examples of homogeneous boards at Facebook Inc. and Twitter Inc. drew attention to the issue, he said.
“That’s been happening now for several years and momentum has been building, particularly in the last one or two years,” Siciliano said. “There’s been a concerted effort by boards to consider a wider range of candidates, which has resulted in a modest increase in the gender diversity on boards.”
Tenure is important to investors because it’s considered an indicator of expertise in areas including accounting, regulators, global operations and the competitive landscape, he said.
“There are hints that the most connected and experienced board members contribute a lot of value to company performance,” Siciliano said.
Pale, Male
Still, white men occupy about 73 percent of the 5,488 board seats in the Fortune 500, according to a 2013 report by the Alliance for Board Diversity, a Washington advocacy group.
Traditionally, boards have recruited from the ranks of very senior management, whose composition has become more diverse in recent years, said Charles Elson, a professor of corporate governance at the University of Delaware in Newark.
“It’s not going to work unless board seats open up,” he said. “The only way that’s going to work is if you try to limit terms.”
Boards are reluctant to grant waivers on retirement age and in an overwhelming majority of cases, directors leave once they reach the limit, said A.J. Kess, a partner and head of the public company advisory practice at the law firm Simpson Thacher & Bartlett LLP in New York.
He cautioned against taking a one-size-fits-all approach to board tenure, which could force out directors with the most talent and institutional knowledge.
“What you’re seeing here is an extension of a troubling trend of a check-the-box governance mindset,” Kess said. “Because they don’t trust boards to make thoughtful and tough judgments, they are going to take those decisions out of their hands.”