There is a strong movement
for director term limits.
I believe that this move is quite counterproductive. Why would we put an arbitrary ceiling
to employee good directors? The limit of terms assumes that most directors are captured
by the management and only provide rubber stampings. Yes, there are many cases of
board capture, where the directors are best buddies with the CEO and have no idea how
the company is being run. However, I strongly believe that this kind of boards are
relatively few because of market forces. A firm cannot have a dysfunctional board for a
long time given that there are hedge fund activists, private equities, and short sellers.
They will jump on the firm to make profit and may literally wipe out the board and the
management. Hence, I believe that we should just let the market do the work. Of course
hedge funds, private equities, and short sellers are not perfect and have their own
ulterior motives. However, they are also subject to the market forces and cannot persist
on engaging in inefficient activism, takeover, or shortselling.
Furthermore, most directors are smart and quite accomplished. They have their own
reputations to protect. Hence, they will implement some governance. Imposing an
arbitrary cap on tenure will created an unintended consequence of turning over
competent directors, which will be a loss to the company, shareholders, and the
economy as whole. Ultimately, we should let the markets do the work instead of trying
to put arbitrary rules.
*From
Snapshot Serengeti
