Nonprofit Organizations and Board Term Limit Policy

Nonprofit Board Term Limits

Nonprofit Board Limits

An Analysis of the Influence of Board Term Limits on Non-Profit Organizations

There has been a significant amount of debate in the literature about what constitutes good corporate governance in regards to establishing term limits on members of the board of directors in non-profit organizations. The debate ranges from arguments that propose that any kind of term limit is unnecessary and could hinder the overall performance of the board, to some kind of term limit being a necessary requisite to proper board management. There are also arguments that rest in the middle of these two poles. For example, some charters will only allow board members to serve so many consecutive years. Thus, after taking some time off, a former board member would reset their clock and be able to return to the board after their break from this position. There are also many other variations and different strategies that are aimed at bridging the divide and creating a structure that facilitates good corporate governance. This analysis conducts a brief literature review and concludes that any generalization about board term limits must be placed in context of the individual circumstances that the board faces. Each organization faces different challenges in regards to corporate governance and thus term limits should be designed to appropriately address these challenges. It is further recommended that the term limit issues be revisited periodically to verify that the policy is effective.

Introduction

There is no clear solution to the question of term limits for executive board members in non-profit organizations. On one hand, setting limits on members can ensure that there is fresh talent on the board at all times. Term limits can protect the board from becoming complacent or disinterested in the activities that the board must oversee. However, on the other hand, setting term limits can also force a very effective and experienced board member to resign prematurely. Each side of this debate can point to specific examples of successful high performances boards that can help to make their cases. Yet when both sides of the debate are considered it is difficult to draw a clear conclusion.

It is not only the research that is divided. Though setting term limits for board members seems to be an increasingly common practice, in the non-profit sector this practice is still only implemented in a minority of institutions. In fact, one survey showed that while sixty four percent of independent institutions in the private sector responded that they include term limits in their corporate governance guidelines, while only forty one percent of non-profit organizations include provisions for board members term limitations (AGB, 2010). However, despite the difference in the specific provisions for term limits between the private sector and not for profit organizations does not seem quite as large when you consider the fact that ninety percent of the organizations in the private sector will allow a trustee who has served the maximum number of limits to serve again after an one year hiatus (AGB, 2010). Furthermore, the average number of consecutive terms allowed in the public institutions was determined to be two while it was three terms in the private institutions surveyed.

This analysis will investigate some of the pros and the cons associated with having term limits for board members. Although many of the common explanations given to justify having or not having term limits may seem rather obvious, other arguments presented are not quite as intuitive. Furthermore, there are many different versions and rules that govern term limits. One example has already been mentioned regarding board members being able to return after a hiatus. Other versions of rules on term limits include obtaining a certain number of petitioners from the organization to allow the member to stay on past their final term, requiring an unanimous vote from the entire board, or even simply a majority vote from the rest of the board members. There have been many adaptations that have resulted from experimentation as to the regulations that govern term limits. Many such examples will be provided as well as a discussion as to the implications for this research.

Advantages of Setting Term Limits

There are different perspectives into which the effectiveness of term limits can be examined. One perspective considers the advantages to term limits when a particular board member is not making productive or effective use of their board position. In many cases a board member may have served a long tenure on the board and this tenure may intimidate or influence other members of the board. This can serve as a powerful disincentive for other members to seek the dismissal of an unproductive member because they fear the power of the tenure or are non-confrontational out of respect or admiration. One consultant has stated that when an executive director has a "Board Chair From Hell" one of the first questions that is generally asked is how long do they have left to serve; the most common responses are one year, two years, or indefinitely (Moyers, 2011). Thus one advantage of having a term limit is that it provides an opportunity to provide a painless and non-embarrassing way for a board member to leave the board when they refuse to do so willfully or gracefully.

Another benefit of establishing mandatory term limits in non-profit organizations is that it creates a sense of urgency in recruitment of new candidates whereas otherwise this could be put off until a much later date. This also facilitates diversity in the board and the reconfiguration of the board composition (Gifford, 2012). Another offshoot of this advantage is that increased board turnover can produce a much larger board alumni group that can be very valuable in regards to creating a healthy professional network. Furthermore, it is commonly assumed that when a board member leaves their position that they no longer inject their talents into the organization. However, many leading non-profits have developed creative ways to retain the talent and experience from high-performing members through the establishment of Advisory Boards, Friends Boards, or other kinds of auxiliary board positions (Otten, 2009). Such creative retention strategies can allow for new leadership to emerge while simultaneously keeping previous leaders close at bay and who are often eager to help with advice or whatever ever else may be needed.

Another advantage to having term limits that may not commonly be considered is that may serve as a positive factor that potential candidates consider before applying for a board position. Serving on the board requires that individuals devote an incredible amount of time and energy in order to fulfill their duties (Moyers, 2011). Therefore, such a commitment may seem more tolerable if the potential candidate knows that there is mandatory time limit for their service. Another less discussed positive aspect to utilizing term limits in non-profit organizations is that it can help with fundraising activities (Moyers, 2011). The board chair is generally one of the organizations best fundraisers through use of their personal and professional contacts. However, after so many years of exhausting one's contacts, a board chair's network may eventually be fully drained of potential leads. Thus bringing in a new chair might work to boost fund raising activities by tapping into a new professional network.

Another aspect of setting term limits that can have a positive influence on both the board and the broader organization is that works to infuse fresh ideas (BoardSource, N.d.). When board members work together for long periods of time then this often produces a level of familiarity that works to produce stagnate thinking and sequesters creativity. However, a board that is in constant flux consistently delivers a different set of group dynamics that can facilitate a new level of awareness through the introduction of new perspectives. For example, a group that has worked together for a decade or more could become familiar with a set routine and be reduced, either consciously or not, to merely going through the motions without being actively engaged to the events unfolding.

Disadvantages of Mandatory Term Limits

Many argue that mandatory rotations in the board of directors will result in the loss of experienced and talented board members. Furthermore, in some sensitive non-profit sectors such as in healthcare, this can also act to reduce the level of accountability amongst the board (Orlikoff & Orlikoff, 2005). For example, if the director of the board is cognizant that there term is almost over, then it could likely be the case that they may not give the same amount of attention to the items that occur towards the end of their tenure that they did when they first took the position. In some industries where accountability is an integral factor for success than this could create a less than ideal situation especially when scandals have plagued the headlines in recent years.

Earl Bakken, chairman emeritus at North Hawau Community Hospital, explains it this way "There is no need to have term limits for board members as long as you have active and productive people. When the hospital goes through a board review process, members who are not productive may be asked not to stand for reelection. (Biggs, 2001)." Thus the problem is not that board members can potentially serve too long, rather it is the board review process that must be accountable. If the hospital review performs its job of reviewing the board's performance effectively then the term limit argument essentially becomes irrelevant. The board members should be monitored a judged based on their performance rather than the total time that they have served on the board.

Another example is provided by credit union consultant George Towle. Mr. Towle proposed this scenario, "if your credit union grew from $200 million to $600 million dollars during a specific time frame, ask, if our board weren't here would the credit union be as successful? (Alden, 2004)" That is, if you board is currently performing at a world-class level, why would you consider making any arbitrary changes to its member composition. While there are many cases in which having mandatory term limits in place may certainly have advantages, there are many other cases, such as the case of a high-performance board, where such term limits can be counter-productive. Furthermore, with a constantly changing board, the members do not have a level of continuity that must develop before a high-performing board could potentially develop (Carter, 2011). This is a serious argument against continually staggering the boards composition and never giving it a chance to develop its potential as a group.

In some of the larger credit unions another challenge emerges. For example, at Pennsylvania State Employees Credit Union (PSECU) which holds over $2.8 billion dollars in assets, learning all of the facets of the organization and its operations is a long and tedious affair. "Our credit union is a large, complex organization…It takes a while for board members to learn and understand what's going on. We don't want to lose that institutional knowledge and perspective by having forced turnover," explains R. Brian Whilbur, board chair (Molvig, 2007). The point he makes is definitely relevant in his situation. In some industries, the organization and the environment maybe so complex that a decade may not be enough time to fully understand the nuances of operations and how they impact various internal and external factors. Thus with a mandatory term limit, it is possible that a board member could be forced to resign before reaching their full development in regards to their position. Furthermore, their replacement would likely have to begin all over with respects to the learning curve which could be detrimental to the board and the organization (Richert, 2008).

The Purpose of Term Limits

Although designated term limits have been argued to have many advantages, some cases have been mentioned in which these term limits could be deemed as ineffective or even counterproductive. However, the usage of term limits was developed with very specific objectives in mind. Therefore, it could potentially be possible to achieve the same objectives in which dedicated term limits were intended to address through other mechanisms or a combination of different methods. Therefore, by defining the goals in which term limits are intended to achieve, this opens up the possibility of finding different routes to achieving these objectives without having to sacrifice the possibility of eliminating a board member who is competent and capable of filling their position.

One of the goals that are inherent in the implementation of restricted term limits is to restrict the possibility of someone overstaying their usefulness. When individuals have served in a position for so long, they could become so familiar with others in the organization and so entrenched in their role that reelecting them becomes routine rather than a consideration of whether or not they are the most qualified to serve in their board position. Furthermore, long tenure can be bad for boards because it allows directors to develop strong friendships with management, friendships that impair effective oversight (Alexander & Koppes, 2003). However, despite the disadvantages that can occur though long tenures, the length of tenure in which it becomes "too" long varies widely on the industry, the individual, the environment, as well as a host of other factors. Therefore, a predetermined tenure could never include all of the variances that might occur in the specific situation.

Another primary objective for the establishment of term limitations is the opportunity to eliminate unproductive board members. Many of the advantages listed in this analysis contained some component of this objective. It seems to be all too common that an unproductive member remains on the board longer than they should do to political reasons or other limitations to replacing the member. However, establishing mandatory term limits remove both excellent and unproductive board members alike without performance consideration. Therefore, while this could mitigate the problem of unproductive board members in some circumstances while removing a high-performance member in others.