Directors: Older and Wiser, or Too Old to Govern?
The past two decades have witnessed dramatic changes to the boards of directors of U.S. public corporations. Several recent governance reforms (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. Many firms have also placed limits on how many boards a director can sit on. 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, firms are increasingly relying on older director candidates. As a result, in recent years the boards of U.S. public corporations have become notably older in age. For example, over the period of 1998 to 2014, the median age of independent directors at large U.S. 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% to 50%.
In our paper, we investigate this boardroom aging phenomenon and examine how it affects boards’ effectiveness in firm decision making and shareholder value creation. We define an independent director as an “older independent director” (OID) if he or she is at least 65 years old. We find that OIDs exhibit poorer board attendance records and are less likely to serve as a member or chair of important board committees. They also display monitoring deficiencies and weaken board oversight in executive compensation, financial reporting, payout policies, acquisitions, and CEO retention decisions. Firms with more OIDs exhibit worse performance, which is not driven by poorly performing firms subsequently appointing more OIDs. Investors appear to recognize this and react negatively to OID 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 OIDs provide particularly valuable experience.
Our research is the first investigation of the pervasive and growing phenomenon of boardroom aging at large U.S. corporations and its impact on board effectiveness and firm performance. 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 OIDs can provide important and timely policy guidance. 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.