LabCorp's mandatory retirement plan

Wednesday, 2-April-2014

LabCorp (NYSE: LH) put out a press release Monday announcing that two directors will be stepping down soon because they have reached the board’s mandatory retirement age of 75.  Setting aside the ironic message this sends from a company whose mission is to otherwise promote health and longevity, it makes little sense from a governance standpoint.

 

The real issue here is not age, but directors becoming entrenched once they join a company's board.  In a nod to shareholders, some companies have taken the easy route to deal with the issue by instituting mandatory retirement policies in order to spur board renewal.  While it is nice that LabCorp recognizes the need to keep their board fresh, the way they have done it is not ideal.  I’d like to make a couple of points about this, and offer some alternative solutions.

 

Age is not the problem

 

Focusing on age obscures the issue.  Warren Buffett, for example, is 83.  Would you want him to serve on your board of directors?  Any company would obviously jump at that, so what does it say about LabCorp that he would be ineligible to serve on theirs?  In effect, it illustrates how foolish they are for letting arbitrary policies get in the way of having the strongest board possible.  It also suggests that LabCorp is not able to confront hard decisions head-on. Those things do not serve the company’s shareholders very well.  To be clear, I am a strong advocate of having more young people on boards, but mandatory retirement rules are not the right way to make it happen.

 

Be concerned about all forms of stale thinking

 

The fact of the matter is that shareholders primarily focus on one simple variable: performance.  All kinds of stale thinking can affect that, and it is doubful age will be the only culprit when it does.  Examples are rampant of younger directors staying on boards for years past when they are a good fit.  The real question should be how do you clear out those people?  Companies need to take a more precise approach to mix things up.  Below are a couple suggestions.

 

Better solutions than forced retirement

 

First, if you are insistent on going the mandatory term limit route, do it for all board members regardless of age.  I’d bet that most companies who choose rules like this simply have a hard time asking any director to leave.  Doing it this way will at least cast a wider net.  The downside of course is that you are guaranteed to let some good directors go, just like with the retirement policy.  However, doing it this way is a more logical approach because it also ensures you will capture all directors who are entrenched and not pulling their weight.  Setting a 10 year policy, for example, is not a bad idea.

 

Second, and by far the best method, is to simply make sure shareholders have the right to vote on all directors each year in a way that is truly fair and representative of their opinion.  This sounds like a simple concept, but it is not practiced very honestly these days.  Many companies stagger their elections across multiple years, and even then the votes are often heavily influenced by the company's own opinion.  Offering a fair annual vote is the most efficient method of tackling the problem because it both tosses the bad directors and keeps the good ones.  In other words, it honors the key productivity measure that shareholders care most about.   Companies should allow shareholders to decide what is best rather than setting arbitrary rules to do it for them.

 

Oddly enough, LabCorp actually does offer this type of vote each year.  Kudos to them for that, but it does make their mandatory retirement issue even more counterintuitive.  My feeling is that if shareholders repeatedly vote for a director in a legitimate way, companies should allow the person to stay for as long as they are willing to serve. 

 

Conclusion

 

Promoting fresh thinking on boards is a good idea that is sorely lacking at many companies, but the process of getting there should be based on the merits of how directors contribute, not their age alone.

Who Am I?

I'm an individual investor from Kansas City.  My focus is on biotech stocks, but I enjoy investing in all industries. I'm an old-school, buy and hold investor who believes the best way to outperform and grow capital is to own innovative companies with good management teams over the long-term. more>>

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