For activist investor Jonathan Litt, the difference between victory and loss in his recent director battle at shopping mall operator Taubman Centers came down to the vote of two big institutional investors.
Vanguard and BlackRock, with an estimated 19% combined stake, agreed to oppose two dissident director candidates after Taubman Centers agreed to improve its governance and refresh its board, according to people familiar with the situation.
Had Vanguard and BlackRock supported Litt and his activist fund, Land and Buildings Investment Management LLC, he would have won the election. Instead, the incumbent board remained intact. A major reason for his defeat was the Taubman family's 30% economic and voting interest in the company.
The large minority controlling stake puts Taubman Centers in a growing category of companies where insiders have either large minority stakes, as is the case with the shopping mall company, and those where founders control majority stakes giving outside investors little influence.
Many companies, particularly in the technology sector, give founders control of a majority of votes even if those insiders own much smaller economic stakes. For example, Facebook (FB) founder Mark Zuckerberg controls just under 60% of the voting power at the social media behemoth but a far smaller economic position.
Nevertheless, Taubman Centers has one characteristic that can be found frequently at companies with controlling shareholders or those with large minority stakes owned by insiders: An over-tenured board. Independent directors Graham Allison, Jerome Chazen, Craig Hatkoff, Peter Karmanos and Ronald Tysoe have been on Taubman's board for 22, 25, 13, 17 and 10 years respectively. (Taubman announced May 30th that it will likely refresh its board in 2018, and it installed two new directors in the latter half of 2016).
Governance experts contend that directors who have sat on a corporate board for more than ten years may be regarded as overtenured because they are too close to top executives and no longer can provide independent oversight of C-suite decisions. Taubman Centers is not alone. According to a review completed by relationship mapping service BoardEx, a service of The Street, the average age of directors at 93 dual class share companies that have been public for 10 years or more is 12.1 years.
That number is above the nine or 10 years that many governance experts agree is the optimal maximum time for a director to serve on a corporate board.
For Litt, the lengthy board tenure was a symptom of a broader disconnect between the company and its shareholders.
"Taubman's abysmal corporate governance structure is characterized by an over-tenured board that oversees the execution of stale policies...," said Litt in a statement. "It is alarming that this board has repeatedly ignored shareholder concerns and the directors' long-standing positions ... will result in continued ignorance of shareholder voices for years to come."
In many cases, insider-controlled companies have even more over-tenured directors. For example, the average number of years of members on Estee Lauder Cos. Inc. (EL) board is 13.68. At International Speedway Corp (ISCA) it is 19.69 and Forrester Research Inc. (FORR) it's 14.03. Sketchers USA Inc. (SKX) is 16.49. Estee Lauder, Skechers, International Speedway and Forrester Research declined to comment.
Directors on Rollins Inc. (ROL) have served an average of 26.39 years, according to BoardEx. Directors on Telephone & Data Systems Inc. (TDS) , a company targeted in the past by activist Mario Gabelli, have been on the board there for an average of 15.85 years.
Jon Lukomnik, executive director at the Investor Responsibility Research Center Institute in New York, said he's not surprised that companies with dual-class or multi-class share structures giving insiders a measure of control also insulate corporate boardrooms, leading to over-tenured directors.
"The whole point of having a multi-class or dual-class share structure is to insulate yourself," Lukomnik said. "Why would you think that the insulation wouldn't extend to the boardroom?"
Lukomnik said that insider controlled companies have boards that are built to give the top executives comfort that they will support their initiatives, a situation that could be good for some companies and problematic for others.
"Some companies operate well within this comfort approach and some companies need to be challenged," he said. "If they are insulated, there are few ways for that challenge to occur before a crisis happens."
Citing recent research conducted by the IRRC, Lukomnik noted that controlled companies, particularly single-class stock controlled businesses, tend to be less diverse and lacking in women and minority representation than non-controlled companies. He added that there usually are more directors with financial expertise on the boards because sponsors or venture capitalists providing funding have seats.
Governance experts argue that corporate boards must refresh themselves periodically to make sure they have directors who meet corporate present needs -- not past ones. "Having some board refreshment helps when the world has changed," Lukomnik said. "Having a cloistered board is not a way for a company to focus on its challenges."
That may be why influential investor advisory firm Institutional Shareholder Services Inc., ISS, considers a non-executive director to be overly tenured if he or she has been on the board for more than nine years.
Anne Simpson, governance director at the California Public Employees' Retirement System, said she's not surprised that dual-class share companies have over-tenured directors. She said over-tenured boards could become out of touch.
"The problem with board quality is that many of these companies have male, pale, stale board members," she said. "Markets are changing rapidly and a generation which 10 or 15 years ago looked like the right people won't necessarily be on top of globalization, cybersecurity, competitive threats, technology and new generations of customers."
She added that board independence and objective oversight of companies can become impaired when boards become over-tenured. "There is no magical number that will tell you when a director becomes overtenured," she said. "However, you won't give an independent scrutiny of management plans when you've been there a long time."
However, many companies have been launching IPOs of late with insider controlled structures because they believe the structures give insiders a little protection from activist managers at the same time that they can still access public market capital.
Backers of the dual class structure push back on the notion that dual-class boards of the future will become over-tenured. Ethan Klingsberg, partner at Cleary Gottlieb Steen & Hamilton LLP, noted that when looking at the average age or tenure of directors at controlled companies, the results may appear to be artificially inflated in part because of board seats occupied by representatives of the controlling shareholders themselves as well as by management directors.
Against this backdrop, Klingsberg argued that there is a sea change shift underway when it comes to these outside directors on U.S. corporate boards, with both insider controlled and non-controlled corporations bringing in outside directors who aren't deferential to C-Suite executives.
"The type of people being looked at as good directors aren't folks who will be unduly deferential to insiders and that goes for controlled and non-controlled companies," he said. "We're seeing controlled companies fill outside director seats with individuals who are increasingly diverse and have a background that indicates they are quite independent thinkers."