June 24, 2018

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Microsoft's Term Limit Pivot

Health system nominating committees seeking guidance on term limits and other director refreshment mechanisms may wish to note the recent related revisions to the Corporate Governance Guidelines maintained by Microsoft Corporation. These revisions relate to matters of director tenure and re-nomination.

As a general matter, Microsoft evaluates its governance framework on a routine basis to ensure that its policies meet the needs of the company and expectations of a diverse set of stakeholders. This practice is consistent with recognized best practices on governance oversight.

More specifically, the Microsoft Board recently adopted a board tenure policy that focuses on an average tenure of 10 years or less for the board’s independent directors. This policy applies to the total years of service collectively for independent directors, rather than individual years of service. Rather than adopting “bright-line” term limits for outside directors, the new Microsoft approach seeks to balance a board composed of directors with extensive knowledge about the company, with those who offer a fresh perspective and those with business experience relevant to Microsoft’s strategic ambitions. Microsoft noted that its new policy was influenced by the perspectives of its investors who actively promote board refreshment and diversity at their portfolio companies.

The revised policy also highlights that directors should not expect to be re-nominated annually. Rather, in making renomination decisions, the Governance and Nominating Committee considers the director’s participation in and contributions to the activities of the board, the results of the annual board evaluation and past meeting attendance.

There are no established governance “best practices” with respect to director tenure and similar matters. Reasonable arguments are regularly made on both sides of the equation. In reaching a position that best serves its governance needs, the health system governance committee benefits from considering how leading companies, such as Microsoft, address similar issues. This can be particularly important given emerging signs that agencies with jurisdiction over health systems may in the future seek to mandate certain levels of board composition as a precondition to the receipt of governmental benefits. 

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About this Author

Michael Peregrine Corporate Governance Lawyer McDermott

Michael W. Peregrine is a partner in the law firm of McDermott Will & Emery LLP and is based in the Firm’s Chicago office.  He represents corporations (and their officers and directors) in connection with governance, corporate structure, fiduciary duties, officer-director liability issues and charitable trust law.  Michael is recognized as one of the leading national practitioners in corporate governance law.

Michael is outside governance counsel to many prominent corporations, including hospitals and health systems, voluntary health...