The Changing State of Board Age Restrictions

The minimum age to drive a car in the US is 16 years old in most states, with a handful of exceptions. Yet, major rental car companies typically will not rent to anyone under 21 years old in most states. Even for those who are 21-24, the ability to rent a vehicle comes with an additional cost, and they can be restricted from renting certain specialty or luxury vehicles. Those under 25 years old are typically subject to a daily “young renter fee” of anywhere from $15.75-$64.75 in addition to the standard car rental price.Much like rental car companies’ policies do with younger drivers, mandatory retirement age restrictions tend to paint everyone with the same brush. While the restrictions do serve the purpose of decreasing the length of the terms board members serve and bringing new members to the table, age restrictions on board members can cost your board valuable experience and knowledge. There are a few reasons why some companies have gravitated toward age restrictions for board members in the past:

Current Trends in Mandatory Age RestrictionsData shows that boards have been skewing older over the years. In fact, many major companies continue to be run by executives well beyond typical retirement ages, such as famed investor and Berkshire Hathaway board chairman Warren Buffet and Fox Corp. chairman Keith Rupert Murdoch, both of whom are 93. Research from the Madison Trust Company shows that the average age of Fortune 500 CEOs is 59.2 years old.  According to data from the Conference Board and ESGAUGE, a data mining and analytics firm, roughly two-thirds of companies within the S&P 500 index have mandatory retirement policies in place for board members once they hit 75, up from just five years ago when 72 was the typical age limit. In addition, the number of S&P 500 companies that have eliminated mandatory age restrictions has also risen in recent years. As of 2023, 33% of S&P 500 companies did not have restrictions in place, up from 2018 when only 30% of companies had eliminated them. Research also shows that smaller companies are less likely to have director age limits.

In cases where companies haven’t eliminated mandatory age restrictions, many have pushed trigger ages out further or have made exceptions to allow individuals to stay beyond age limits. Data shows that From 2018 to 2022, the number of S&P 500 companies that had retirement policies in place with no exceptions dropped significantly from 41% to 34%. This trend is particularly useful in instances when organizations are going through difficult times and deep institutional knowledge is vital. Alternative Approaches To Consider Though many of the reasons behind mandatory retirement restrictions are no longer viewed to be of such great concern, it is still important to ensure the overall competency of board members. As an alternative to age limits, a growing number of companies have turned to comprehensive evaluations of boards looking both at individual attributes of members as well as experience and the value they can provide. Such evaluations typically extend to assessments of committees and individual directors and are sometimes done by an outside independent third party that can provide an unbiased perspective. These comprehensive evaluations have soared in popularity, with the number of S&P 500 boards employing them increasing from 37% in 2018 to 52% in 2022. This practice can help evaluate the board’s overall performance and identify performance concerns, rather than basing decisions on age. On top of comprehensive board reviews, there has been an increase in the adoption of “overboarding policies”. These policies put a limit on the number of public company boards directors can be part of. As of 2022, 72% of S&P 500 firms had overboarding policies in place, up from 64% in 2018. This ensures that board members are not overcommitted to serving on multiple boards of directors, encouraging them to pick and choose, if they do exceed a certain company’s limit.One way to promote turnover without the decision being related to age is to set guidelines for maximum tenure. The board can enact a policy to set this limit for all incoming board members so that they will be aware of when their retirement from the board is expected from the day they join.As community financial institutions seek to maintain balanced and diversified boards, with members boasting varied levels of experience and institutional knowledge, mandatory retirement is a well-known tool that can help accomplish the goal. However, it’s prudent to consider a more flexible approach that can ensure that board members are evaluated on more than just their tenures and ages. They possess crucial institutional knowledge that the company needs to ensure is maintained and passed down to others in the company before a board member considers leaving their post.