Australia has backed down from plans to encourage companies to limit the tenure of independent directors, a move that risks making the country appear softer than others on corporate-governance standards.
A committee that includes dozens of Australia's biggest and most influential business and investor groups had proposed to cap the terms of independent directors at a maximum of nine years. At the moment, there are no guidelines on how long independent directors should serve.
Two people familiar with the matter, however, said the proposal -- part of a suite of recommendations on corporate governance to be published Thursday by the ASX Corporate Governance Council -- now wouldn't be included in the final guidelines.
The decision to exclude the proposal came after the council met resistance from some of the country's biggest companies, according to the people.
Still, the move places Australia at odds with other countries -- including Britain, France, Hong Kong and Singapore -- that have recently limited the tenure of independent directors to help allay investor concerns that long-serving board members tend to get too cozy with management.
The council released draft amendments to its existing corporate governance guidelines back in August, and then farmed them out for public consultation. The 21-member body is made up of shareholder and industry associations that represent everything from accountants to pension funds.
The council itself wouldn't confirm whether its recommendation on outside directors had been dropped.
An investigation by The Wall Street Journal has found that 76 of the 357 non-executive directors currently employed at Australia's top-50 listed companies -- or 21 per cent -- had served on their respective boards for at least nine years. The highest concentration of those that have been there nine years or longer was found to be at National Australia Bank, the nation's fourth-largest lender, with a total of seven long-serving independent directors.
Hospital owner Ramsay Health Care has six external directors, while BHP Billiton, Australia's second-biggest company by market value, has four, including David Crawford, who has served for two decades.
"The longer you're there, the more conservative you become," said Stephen Mayne, a spokesman for the Australian Shareholders Association, which represents mum-and-dad investors. "It lessens your ability to change because you're also a prisoner of your own mistakes."
Outside directors traditionally aren't supposed to have too close a relationship with companies or their management and aren't typically permitted to own any of its shares. The main reason companies engage such individuals, in theory, is to get their impartial oversight on key decisions such as acquisitions or hiring and firing key executives.
Corporate governance guidelines do, however, vary from country to country. France is among the most stringent when it comes to the question of tenure, preventing directors from qualifying as independent after sitting on a board for more than 12 years. Hong Kong has a nine-year limit on the tenure of external directors unless shareholders vote for an extension.
Australia's guidelines in this area aren't mandatory. Yet the council's proposal fell short even of recommending that companies remove independent directors that serve for more than nine years off their boards. The idea was, as in Britain, to offer companies an 'If not, why not?' option, encouraging them simply to explain to shareholders the reason for an extension of an independent director's tenure beyond that threshold.
Like elsewhere, Australian companies' boards are expected to have a majority of independent directors. Companies would have had some wiggle room to keep long-tenured directors so long as the independent ones continued to constitute a majority of the board.
Still, had the council's proposal been approved, some companies currently respected for their corporate-governance standards might have faced greater scrutiny from investors that could have scarred their reputations.
One of the world's biggest proxy advisers to investors, International Shareholder Services, supports the idea that tenure, while not the best measure of independence, can be a useful tool for ensuring good governance.
"Are they still thinking independently, or have they become part of the furniture?" said Ulysses Chioatto, a Sydney-based executive director at ISS.
Some companies, however, said there is considerable value in having long-serving directors on their boards.
If independent directors are made to leave after nine years, "you're actually sacrificing great experience and in some cases unique talents in order to meet an arbitrary definition," said Steven Burrell, a public affairs manager at the Australian Institute of Company Directors, which is a member of the council.
BHP Billiton said in its submission to the consultation that governance at mining companies that build projects that can take many years to develop is helped by having talented longer-serving directors on its board.
A spokeswoman for National Australia Bank said independent directors with many years of experience with the company were vital to dealing with "the complexity of the group's portfolio and the regulatory environment." A spokeswoman for Ramsay Health Care declined to comment.
Efforts to limit director terms haven't gained much traction in North America, where listed companies typically are exposed to less onerous regulation. Around a third of the companies in the Russell 3000 Index had independent directors serving for more than 10 years, while 28 had served for at least 40 years, according to a separate Wall Street Journal investigation in June.