The Effect of Board Tenure on Firm Performance

Sterling Huang of Singapore Management University and Gilles Hilary of Georgetown University have published an interesting paper titled, "Zombie Board: Board Tenure and Firm Performance." They found a curvilinear relationship between average board tenure and organizational performance. Not surprisingly, financial results increase as board members gain some experience and learn about the firm and its industry. However, when average board tenure exceeds ten years, firm performance begins to decline. The authors argue that there are diminishing marginal returns associated with learning and experience. At the ten-year mark, the deleterious effects of board entrenchment become more pronounced and began to have a serious negative effect on performance, overwhelming any small amounts of learning that are continuing to take place. 

Lengthy board tenure not only diminishes firm performance, but has an effect on key decisions made by the board. The authors note that, "A level of tenure close to the optimal reduces excess compensation and increases the pay-performance sensitivity." Huang and Hilary also find that CEO entrenchment exacerbates the negative impact of lengthy board tenure. In short, the mix of board and CEO entrenchment can be very bad for organizations. They conclude by stating, "Our results are consistent with the interpretation that directors’ on-the-job learning improves firm value up to a threshold, at which point entrenchment dominates and firm performance suffers."