The author is a Reuters Breakingviews columnist. The opinions expressed are his own.

By Jeffrey Goldfarb

NEW YORK, Feb 18 (Reuters Breakingviews) - It’s almost as if U.S. companies want to attract the attention of headstrong investors. Despite years of warnings about the dangers of allowing board members to overstay their welcome, the habit persists and keeps inviting trouble. Placing a time limit on how long directors can serve would have many benefits. One of the biggest would be to ward off dissident shareholders, or at least force them to refresh their own tired thinking.

Although experience, continuity and historical knowledge are valuable attributes in the boardroom, U.S. companies tend to overdo it in a way that breeds stagnation and crony capitalism. It’s no wonder shareholders are increasingly zeroing in on the inertia. Two-thirds of activist investor campaigns between 2021 and late 2024 preyed on companies with at least three directors in their roles for a decade or more, according to law firm Skadden, Arps, Slate, Meagher & Flom, citing data from investment bank Evercore. Ski slope operator Vail Resorts MTN.N and casket maker Matthews International MATW.O are two of the latest to come under siege, with tenure as a factor.

At Matthews, the stock price has tumbled by nearly half since mid-2023, inviting pushy investor Barington Capital to note that the board’s collective tenure averaged more than 11 years, 60% longer than at the typical company in the Russell 3000 Index .RUA. The board defended its composition, touting the addition of two new independent members over the past two years. Even so, proxy advisory firms Institutional Shareholder Services, Glass Lewis and Egan-Jones all recommended that investors support Barington’s three nominees at this week’s shareholder meeting.

Companies often push back, and there’s little evidence to suggest that management teams see a problem. Fewer than 10% of S&P 500 Index .SPX constituents impose a cap on director tenure, and most that do set it at a protracted 15 years or more, according to corporate governance research firm ESGAUGE. Retailer Target TGT.N and networking gear maker Cisco Systems CSCO.O will only show a non-executive director the door after two decades.

Many companies insist they don’t need a binding rule to routinely bring in fresh faces, but lingerers persist. As of last year, nearly 1,300 sitting independent directors, accounting for more than a quarter of the total at S&P 500 members alone, had been around for more than a decade. About 13% of them racked up at least 15 years of service, making it hard to take an independent designation seriously.

Goldman Sachs alumnus John Thornton, for example, is the lead independent director at carmaker Ford Motor F.N, where he has been on the board for nearly three decades. Former Blackstone President Tony James has racked up 36 years as a director at retail giant Costco COST.O, more than seven of them as chairman. And with 50 years at insurer W.R. Berkley, ex-investment banker Mark Shapiro is the longest-serving independent director at a company in the benchmark index, per ESGAUGE data.

More broadly, the United States held the ignominious second-place spot for longest-serving non-executive directors, among 17 countries analyzed by hiring consultancy Spencer Stuart. At almost eight years, the average U.S. board member’s tenure lagged only that of Mexico and was nearly double the length of service in Britain, where a governance code generally considers a director’s independence impaired after nine years. Hong Kong’s bourse operator also recently enacted rules that will ban boards from having independent non-executive directors who have served for more than nine years.

There are sound financial reasons to avoid entrenched boardrooms, and the stale thinking they often beget. Companies generate their best returns when outside directors have an average tenure of eight to 10 years, before performance starts falling, according to a comprehensive study published in 2018 by Singapore Management University. Boards with shorter tenure make better investment decisions that lead to higher valuations, while ones with longer tenure “are more likely to engage in value-destroying acquisitions,” researchers concluded.

One problem is that, because of the clubby nature of boards, directors are often reluctant to usher out colleagues lest they be ejected next. Privately, however, directors have never been less happy with their peers, based on consultancy PwC’s most recent annual survey. Half the respondents said at least one member should be replaced and a quarter reckon it’s time for at least two to be ousted.

Mandated turnover would limit contributions from some useful directors but probably push out far more timeworn ones. Market discipline has its limits, too. There just aren’t enough activist investors to go around, and many boards either hope to escape notice or find other reasons to overlook the evidence.

Performance can help insulate against external criticism. Warehouse builder Prologis PLD.N implemented a 15-year maximum term in 2023, only to scrap it the following year after shareholders indicated they did not think it was necessary. The $110 billion company has a 75-year age limit on membership, as some other boards do, but five of its 11 directors, including the lead independent one, have served for at least nine years. With a roughly 175% total shareholder return over the past decade, outperforming major real estate investment trust yardsticks, Prologis could make the case that its board evaluation process is not obviously hurting shareholders.

Sweeping rule changes also would be hard to enact. Individual U.S. states hold power to regulate corporate governance, but that approach would create an awkward patchwork. American stock exchanges, too, could adopt standards. They’re probably hesitant to do so, however, after a federal court in December struck down Nasdaq’s board diversity rules, saying the U.S. Securities and Exchange Commission exceeded its authority by approving them.

This ultimately leaves the decision up to companies themselves. If they’re not persuaded by the benefits of steadily embracing new perspectives to complement ingrained ones, or that longer-tenured boards are linked to weaker financial performance, maybe they can appreciate the defensive value. By firmly capping service at a decade, companies would neutralize a powerful weapon in activist investors’ arsenals. By doing so, it would compel such agitators to find some new ammunition of their own.

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(Editing by Peter Thal Larsen and Streisand Neto)

((For previous columns by the author, Reuters customers can click on GOLDFARB/jeffrey.goldfarb@thomsonreuters.com))