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John P. Gavin, CFA, is the founder and CEO of Disclosure Insight®, an independent publisher of investment research. Mr. Gavin has spent his entire career of over 25 years in the financial services industry. Prior to starting “DI” in 2000, he worked as an equity analyst and portfolio manager with... More
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  • Curtiss-Wright Understands the Potential Consequences of Director Turnover 0 comments
    Dec 1, 2011 4:51 PM | about stocks: CW, CHD

    The departure of one-third of its directors over a 3-year period was concerning enough for CW to file an 8-K and take action to mitigate the consequences of its mandatory retirement policy and related departures. The board’s actions stemmed from its concern that the “higher than typical” board turnover would disrupt the “culture of collegiality and consensus that characterizes its operations."

    Although turnover is an inevitable occurrence that can drive healthy renewal of the board, it can also be harmful to a company on a number of levels. CW’s historical board stability and acknowledgment of the important issue of board turnover should prompt investors to wonder why we don’t see more companies that show this level of concern for maintaining a stable board and retaining key personnel.

    For over 8 years, CW’s Corporate Governance Guidelines have included a policy that sets a mandatory retirement age for directors. This policy requires directors to retire from the board effective the annual meeting following their 75th birthday, unless they are asked by the board to continue to serve beyond that time.

    As of 24-Mar-11, CW’s board was composed of 9 directors, 3 of which were 73 years of age or older. At the time, William Mitchell was 75, John Myers was 74, and William Sihler was 73. This indicated that CW would lose 3 directors during a 3-year period due to its mandatory retirement policy.

    In its 2011 proxy statement, the company stated that director Mitchell had decided to retire from the board just prior to the annual meeting of stockholders, which was scheduled for 6-May-11. In an 8-K filed 12-May-11, the company announced that its board had voted on 7-May-11 to waive the application of the mandatory retirement policy and retain Mr. Mitchell as a director for an additional year.

    One of the risk factors that we routinely look at is director turnover. We typically become concerned when director turnover exceeds an average of one director per year. So it is gratifying to see a company as concerned with director turnover and its potential negative impact as CW.

    Moreover, rarely do we see a company acknowledge the significance of board turnover the way that CW articulated it in its 8-K filed 12-May-11:

    Curtiss-Wright Corporation’s (the “Company”) mandatory director retirement age of 75 will force the replacement of three Board members over the next three years. The Board is concerned that this higher than typical Board turnover will disrupt the culture of collegiality and consensus that characterizes its operations. After extensive discussion, the Board voted on May 7, 2011 to waive the application of the mandatory retirement policy and retain Mr. William B. Mitchell as a director for one year beyond his 75th birthday to support a successful transition to the newly constituted Board in the wake of the annual meeting. The Board believes that this action is in the best interest of the Company as it provides for an orderly transition so that the Board’s operations would not be adversely affected by the higher than typical turnover involved in replacing three directors over successive years. This action also retains continuity in Board experience and allows the new directors the benefit of working with the predecessors and having an extended opportunity to learn Board practices and culture.

    In contrast to CW, we often times see companies that experience more significant levels of turnover, sometimes under less favorable circumstances, yet they take no action to address or mitigate the turnover or its negative effects.

    For example, from 31-Dec-05 through 5-May-11, Church & Dwight Company (CHD) lost 10 independent directors with over 180 years of aggregate experience serving on the company’s board.

    Stocks: CW, CHD
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