DEFINITION of Director Rotation
Director rotation is a process to cycle corporate board members service lengths and methods to vacate their positions. A policy regarding director rotation, or rotation of directors, may be included in a corporation's corporate governance policy and can specify the term that each member serves as well as the number of board positions that will be up for re-election each year.
Director rotation can also be a process to rotate board members between various committees or the rotation of board chair roles.
BREAKING DOWN Director Rotation
An example of a typical director rotation policy can be one that specifies that one-third of the directors will "retire by rotation" — vacate their positions — leaving them open for new directorship each specified period. The directors that have served the longest will be included in the one-third to retire by rotation. Directors are typically elected at the corporation's annual meeting.
The idea of director rotation often comes back to developing strong corporate governance practices. As such, no universal or blanket policy works in all instances. Corporate boards must weight the pros and cons of rotating their members.
Reducing entrenchment, conflicts of interest and encouraging new leadership is often a valid reason for board rotation policies. However, this can encourage short-term outlooks and overly risky behaviors. Others cite board rotations as a way to weaken corporate director knowledge levels, as board members with lengthy tenures often know the business well — they've led through the good and bad spots.
Corporate board performance is continuously under experimentation. New sticks and carrots come and go to incentivize corporate managers. Capital markets' emphasis on strong corporate governance waxes and wanes with the economy.