Over the past couple decades, boards of public companies have been trending older. Fei Xie, the Chapin Tyler Professor of Finance at the University of Delaware’s Alfred Lerner College of Business and Economics, was analyzing numbers and noticed something in the years 2003-2005 — a jump in the average director age. Intrigued, he decided to investigate the phenomenon and its effect on boards.
The resulting paper, “Directors: Older and Wiser, or Too Old to Govern?” is a collaboration with three other researchers and published online in October in the Journal of Financial and Quantitative Analytics. It indicates that older board members are less effective in general, even though they can bring strength from their years of experience.
What prompted this jump in age in the early aughts? After the collapse of Enron, reform attempts like the Sarbanes-Oxley Act and new stock market listing standards aimed to increase director independence, Xie said. That meant there was suddenly more demand for directors as boards looked to refresh.
But with increasing demands and accountability in these roles, upper-level executives were also less likely to want them, the researchers said. Boards then turned to older executives to help fill the gap.
From 1998 to 2014, they discovered, “the median age of independent directors at large U.S. firms rose from 61 to 64.” More importantly, the share of companies with a majority of directors who were 65 or older nearly doubled, from 27 to 50 percent.
The trend continued for years, although the analysis shows the average age has now started to decline slightly.
Xie and his co-authors weren’t the only ones to notice the aging director trend, and he thinks some of the resulting pushback in recent years by activist investors and others for younger, more diverse boards, with calls for term or age limits, helped stall the trend.
Investor pressure came in the form of the stock market as well, where the researchers found that company stocks lost value after older directors were appointed.
Why the concern? Older people can bring a lot of wisdom and experience, after all, and recent years have seen a movement to value their contributions in the workplace.
Xie isn’t suggesting that older directors have nothing to offer. But at the same time, it’s basic science that people begin to experience some decline with age, Xie noted. The paper mentions previous research that finds older people lose memory and attention span, and are not as good at processing information.
The new research bears this out. Xie and his collaborators found that older directors — defined as age 65 and up — did not carry out their responsibilities as well or attend as many meetings. CEO pay went up and there was less CEO turnover in response to poor performance, which they suggest indicates poorer monitoring and accountability, perhaps because of reduced ability to deal with new information.
“While older independent directors may well be in the upper tail of their age group in terms of physical health or intellectual ability, these general physiological factors can nonetheless hinder their ability to meet the heavy demands of boardroom duties,” Xie and his co-authors state in the article.
They also found that company acquisitions tended to be less profitable, and audit committees with a higher proportion of older directors were more likely to see financial misrepresentation. Xie summed up the performance as “subpar.”
It wasn’t all bad. They found evidence that older directors’ experience, wisdom and networks could be helpful, especially in companies that were facing a stark need for guidance.
“But the best we could find is that it’s a wash,” Xie said. “Basically whatever value add they provide seems to only be able to offset the negative impact that they will have on firms.”
Of evidence that older directors are having a net positive impact, Xie said, “It’s just not there.”
The team of researchers analyzed factors like financial returns, stocks, meeting attendance, time investment and shareholder support. They took into account alternate explanations like the age of management teams at companies, the age of the companies and the possibility that struggling companies might turn to older directors to fill their boards.
If companies are considering raising their mandatory retirement age, the authors write, “Our evidence should give them pause.”
It’s not impossible for these companies to recruit younger directors, Xie said. They just need to broaden their criteria beyond a traditional emphasis on experience as a CEO or top executive. Doing that, “you limit yourself to a very, very small pool.”
Younger candidates may have less experience, but more intimate knowledge of business operations, along with more incentive to bolster their careers by performing well as a director, he said.
“By not being so fixated on those types of experience, by going down the corporate hierarchy just a little bit, I think firms can find younger and potentially equally qualified candidates.”