The recent decisions by Marks and Spencer and British American Tobacco to extend their chairs' tenures beyond the nine-year guideline have reignited a crucial debate about whether UK corporate governance has lost sight of pragmatism in favour of rigid adherence to arbitrary timeframes. The QCA Corporate Governance Code, applied by nearly 700 companies including 92% of those whose shares are traded on AIM, many constituents of the Main Market, and three-quarters of companies quoted on the Aquis Stock Exchange, offers an instructive contrast that suggests a more nuanced approach may be warranted across the board.

The FRC's UK Corporate Governance Code, which applies to premium-listed companies, now requires chairs to step down after nine years with no exemption for smaller companies, a change that removed previous flexibility for firms outside the FTSE 350. This one-size-fits-all approach has created practical difficulties that go beyond the headline-grabbing cases of M&S and BAT. When a company is midway through a transformation, recovering from a cyber attack costing £300 million, or navigating a fundamental shift in its business model from cigarettes to smokeless products, the timing of leadership changes matters enormously.

The article's observation that the median overlap time between CEO and chair has dropped from 4.5 years (pre-2015) to just 2.1 years (post-2016) reveals the unintended consequence of governance by numbers. With CEO turnover increasing as boards take a more hands-on approach, the rigid nine-year chair limit creates a revolving door effect that undermines the very stability and institutional knowledge that effective governance requires. As one boardroom adviser noted, if there have been three CEO changes in a short period and the company has gone through turmoil, "it's obviously a bad time to change chair."

The Mid-Market Perspective: A More Flexible Approach

Whilst all companies listed on the Main Market of the London Stock Exchange are required under the Listing Rules to follow the FRC's UK Corporate Governance Code, AIM companies can choose which corporate governance code they use. This distinction is particularly revealing when examining how governance frameworks affect mid-market companies.

The QCA Code is specifically tailored for smaller, growing companies whether already traded on a public market or privately owned, and its approach to chair tenure offers an illuminating alternative. Notably, the QCA Code does not impose a rigid nine-year limit on chair tenure. Instead, it emphasises board effectiveness, diversity in the widest sense, and regular board evaluation, trusting companies to exercise judgement about when leadership changes serve the long-term interests of the business.

The QCA Code's "comply or explain" approach ensures that governance supports stability during major transformations or successions, rather than being a rigid, "one-size-fits-all" rule, precisely the flexibility that the FRC claims its own code provides, but which companies appear reluctant to invoke for fear of being seen as non-compliant.

The mid-market context also reveals why formulaic tenure limits are particularly problematic. For companies outside the FTSE 350, external board evaluations are encouraged but not required, recognising that smaller companies face different resource constraints and operate in different contexts. Similarly, smaller companies are not required to have more than two independent non-executive directors, whereas larger companies need at least three. These proportionate accommodations acknowledge that governance should serve the company, not the other way around.

Yet even the QCA Code has evolved to become more prescriptive in certain areas. The 2023 iteration expects all directors to submit themselves for election or re-election on an annual basis and requires independent non-executives to comprise at least half of the board, requirements that, whilst less onerous than the UK Corporate Governance Code, still reflect an increasingly rules-based rather than principles-based approach.

The Wider Implications

The cases highlighted in the article, M&S, BAT, and HSBC, demonstrate three distinct scenarios where rigid adherence to the nine-year rule creates problems rather than solutions. M&S faced the prospect of losing experienced leadership at a critical juncture in its turnaround. BAT needed more time to find the right candidate willing to work in a "sin stock" industry whilst maintaining continuity during a fundamental business transformation. HSBC's messy succession process, which resulted in appointing a chair who had previously expressed reluctance to take the role long-term, exemplifies what happens when the search for the perfect candidate collides with governance deadlines.

The Institute of Directors' position that extending chair tenure beyond nine years leaves chairs "open to accusations of losing independence and becoming too close to company management" represents the orthodoxy. But this view rests on the questionable assumption that independence is primarily a function of time rather than character, incentives, and robust board dynamics. A chair who has been in post for seven years is not inherently more independent than one who has served for eleven years, particularly if the latter period has seen multiple CEO changes, board refreshment, and transformational challenges requiring institutional knowledge.

The article references the original Cadbury Code from the 1980s, which arguably gave boards more leeway to exercise judgement. This historical perspective is instructive. The Cadbury Code was introduced following corporate scandals, yet it managed to establish rigorous governance standards whilst preserving flexibility for boards to act in the specific circumstances of their companies. Three decades of iteration have produced more detailed, more prescriptive codes that paradoxically may produce worse outcomes by preventing sensible decision-making.

A Path Forward

The solution is not to extend the default tenure limit from nine to twelve years, as some headhunters suggest. This merely replaces one arbitrary number with another and fails to address the fundamental problem: governance by formula rather than governance by judgement.

Instead, the FRC should take inspiration from the QCA Code's more flexible framework and explicitly encourage boards to exercise the judgement they are supposedly appointed to provide. The current "comply or explain" mechanism exists in theory but appears to function poorly in practice, with companies fearful that any explanation will be seen as a black mark. As one person close to M&S observed, shareholders themselves called the nine-year rule "ridiculous" in the company's circumstances, yet the company still felt compelled to navigate the explanation process carefully.

The QCA Code requires companies to apply ten principles and publish certain related disclosures that describe the company's own position and why they have chosen it, rather than treating adoption as a compliance exercise. This approach, which focuses on disclosure, reasoning, and shareholder engagement rather than arbitrary timeframes, offers a more mature model for corporate governance.

For mid-market companies, the QCA Code's approach already provides this flexibility. The real question is why the UK's largest companies, with the most sophisticated boards and investors, are subject to more rigid rules than their smaller counterparts. If anything, the governance framework should trust FTSE 100 boards to exercise judgement at least as much as it trusts AIM-listed companies.

The recent extensions at M&S and BAT, underpinned by shareholder support and clear commercial rationale, demonstrate that investors are perfectly capable of evaluating whether tenure extensions serve their interests. Rather than viewing these cases as problems requiring stricter enforcement, regulators should see them as evidence that the current framework prevents sensible decision-making and needs reform.

The nine-year rule made sense as a guideline to prevent entrenchment and ensure board refreshment. But when guidelines become de facto rules, when explanations become excuses, and when commercial common sense is subordinated to governance orthodoxy, it is time to reconsider whether we have lost the balance between structure and flexibility that effective corporate governance requires. The mid-market has already found a better way. It is time for the rest of the market to follow.