Director Retirement Policies Drawing A Big Yawn

When ConocoPhillips recently realized that four board members hit the oil giant’s mandatory retirement age of 70, the company came up with a simple solution for retaining them—it extended the retirement age to 72.

Presto: The four individuals can remain on the company’s staggered board.

The amendment affects Norm Augustine and Larry Horner, who are standing for re-election at the May 2005 shareholders meeting, and Stapleton Roy and William Rhodes.

The company also said Frank McPherson will retire at this year's shareholder's meeting under the new policy.

Why bother having a retirement rule when you only wind up changing it when it suits your needs? ConocoPhillips wouldn’t comment, pointing out in an email statement, “Because we weren't party to the board's discussion regarding amending the retirement policy, we cannot provide any additional detail behind that decision.”

It did add that, “With Sarbanes-Oxley, more time is required of directors, and that factor may be shifting ages up [at many other companies in general] since there are many people with significant and valuable experience who would have more time to serve once they've retired from the work force.”

Bowie

Carol Bowie, director of governance research for the Investor Responsibility Research Center, says it is not unusual for companies to change the retirement age when cherished directors hit their mandatory age. “It depends on the situation,” she says.

No Policies; Cold Issue

The entire issue of board retirement, however, is not exactly a hot one for governance activists, who seem more interested in issues like proxy access, executive compensation, board declassification, and shareholder rights plans. For example, last week, the AFL-CIO trotted out a list of 28 companies on its 2005 “Key Votes List”; 10 companies made the list because of board director issues, yet none were singled out for their director retirement age policies.

During the 2004 annual meetings, there were just seven resolutions calling for limiting director tenure. But all of those addressed term limits in general, not retirement age specifically. In any case, none of them were supported by more than 8 percent of the shareholders who voted, according to Georgeson Shareholder.

TIAA-CREF does say on its Web site that it does not support arbitrary limitations on the length of director service, but adds it believes the board should establish a director retirement policy. “A fixed director retirement policy will contribute to board vitality,” it asserts.

However, the Council for Institutional Investors doesn’t even have an official policy for board member retirement. “It has not been an important issue for our members,” concedes Ann Yerger, executive director of the CII, which provides investment services to pension funds.

Ross

“Typically, it’s more of a routine business matter,” says Andrew Ross, partner with Loeb & Loeb. But, he does concede there are conditions, “whereby managements can use an amendment to perpetuate directors supporting management.”

70 To 75 Years

Altogether, about 35 percent of the total companies tracked by the IRRC have a retirement policy. About half of these companies require directors to retire at 70 while about one-third force them to pack it in at 72, according to Bowie. This pattern hasn’t changed for a few years, she adds.

A recent Conference Board survey found that nearly two-thirds of 510 companies have a mandatory retirement policy for their directors, ranging from a low of 55 years old to a high of 80. However, nearly half of those require retirement at 70.

Those who actually sit on the boards seem to think a mandatory retirement age is a good idea. In a recent survey of about 200 directors conducted by Pearl Meyer, three-quarters support a mandated board retirement age, with nearly all recommending somewhere between 70 and 75 years as most appropriate.

Essentially, the argument for a mandatory retirement age is that it encourages director turnover while opponents say that age is not the biggest criteria for determining an individual’s value to a company’s board. “It is difficult to have hard and fast rules,” Yerger asserts. “It’s impossible to make generalizations.”

Loeb & Loeb’s Ross says the argument against a mandatory retirement age is the same as the one against term limits—that it takes time for a director to fully understand the company for which they are serving. “If you [are forced to] turn over the director you may be losing very useful knowledge and contribution,” he adds.

In fact, as the time demands of top-notch candidates continue to escalate at their full-time jobs—especially given Sarbanes-Oxley requirements and intense global competition in general—many boards are finding it increasingly difficult to attract individuals with expert credentials who are currently serving as in high level roles such as chief executive officer.

Frequently, many of these types of individuals don’t even become available to serve on boards until they retire from their day jobs. This could come when they are well into their 60s. So, having, say, a mandatory retirement age of 70 for a board member could preclude having a highly coveted individual serve on a company’s board.

Yerger argues that you need these high-level types to serve on boards, especially to stand up to those powerful, imperial CEOs like Disney’s Michael Eisner, for example. She adds, you need “equally statured boards.”

Raber

In fact, one growing trend to watch: Companies are instituting some sort of accountability structure, whereby they assess how well a director is performing, says Roger Raber, president and CEO of the National Association of Corporate Directors. He claims that at least 30 percent of companies have this process in place. He adds that in most of these cases, “you are less likely to see age limits.”