All About Board Director Term Limits and Why They Matter

Understanding Board Director Term Limits and Their Importance

By Paul Stark, general manager, OnBoard

Imagine this scenario:

• You are recruited to head up a nonprofit organisation as its new CEO.
• After your first few board meetings, you notice that only a third of the board members actively participate.
• When you raise the issue with the board chair, she empathises but says there’s nothing she can do. “We’ve always brought in new board members when someone steps down on their own. We don’t have term limits.”

This is not a far-fetched scenario. According to BoardSource, the respected authority on nonprofit governance, nearly a third of nonprofit boards do not have term limits. In this post, we’ll define term limits, examine why they matter, and detail why we recommend having them.

What are Terms?

Terms are simply a length of board service. Typically, they are spelled out in an organisation’s bylaws.

• For nonprofit organisations, BoardSource recommends two consecutive three-year terms.
• For for-profit corporate boards, the National Association of Corporate Directors (NACD) recommends term limits of 10-15 years.

Both organisations also recommend a staggered term system that allows for a certain number of new members to be chosen each year and limiting the number of terms expiring at the same time. That way, boards can maintain continuity and new members have mentors with institutional experience.

Ultimately, term limits help ensure that a board’s composition reflects its current and forward-looking leadership needs.

What Do Term Limits Accomplish?

According to Roger Raber of the National Association of Corporate Directors (NACD) and Judith O’Connor of the National Center for Nonprofit Boards (NCNB), both for-profit and nonprofit boards face the same fundamental challenges:

• Managing the pace of constant change brought on by technological advancement
• Guiding the organisation toward sustainable, long-term growth in a hypercompetitive environment
• Developing board talent with an increased emphasis on core personal and professional competencies

Term limits provide a mechanism for bringing in new members with fresh ideas to tackle these challenges. This is especially true for boards as they deal with the long-term ramifications of the COVID-19 pandemic, too.

When the pandemic broke, boards had to grapple with a new level of disruption and uncertainty. In an EY study, only 21% of board members indicated they believe their organisations were “very prepared” to respond to an adverse risk event such as COVID-19.

Planning, communications, recovery, and resilience efforts were all affected by board composition. In that same EY study, less than half (40%) of board members indicated they were “satisfied” with managing new and emerging risks. The critical obstacle cited was the lack of board member talent with appropriate skillsets.

Ultimately, term limits help ensure that a board’s composition reflects its current and forward-looking leadership needs.

5 Key Benefits of Term Limits

There are five key benefits term limits provide.

• Making it easier to bring in new ideas and new perspectives to a board and its decision-making process
• Providing a systematic planning timeline and process for replacing needed board skills
• Giving a board member a chance to step down gracefully if they are burned out, have family commitments, or are ready to move on
• Provide a respectful and efficient mechanism for the exit of passive, ineffective, or troublesome board members
• Avoiding the perpetual concentration of power within a small group of people and the intimidation of new members by this dominant group

Additionally, there are several drawbacks to term limits that we recommend bearing in mind.

• Potentially losing institutional memory and expertise that has benefited the board over time
• Needing to dedicate additional time to re-building the cohesiveness of the board as new members join and old members rotate off
• Needing additional resources to help identify, recruit, and orient new board members

In the short-term, the lack of term limits can make it difficult for a board to bring on new leadership equipped with the skills needed to respond to fast-changing events.

Over the long term, it can hurt an organisation’s ability to expand and reach new audiences, especially in terms of diversity, equity, and inclusion (DEI).

Short-Term and Long-Term Impact of Term Limits

In the short-term, the lack of term limits can make it difficult for a board to bring on new leadership equipped with the skills needed to respond to fast-changing events. Over the long term, it can hurt an organisation’s ability to expand and reach new audiences, especially in terms of diversity, equity, and inclusion (DEI).

At the WCD’s recent 2020 Virtual Global Institute, Julie Hembrock Daum of Spencer Stuart said that low board turnover (8%) helps keep minority candidates from getting onto boards. While she also predicted “we will see the numbers significantly change” this year, this low turnover rate also uncovered an opportunity where better skills evaluations can help boards bring on new members of different genders and minority groups. After all, if you don’t measure your current directors’ effectiveness, it’s hard to know when fresh blood is needed.

Term Limits are a Mechanism for Change

As the needs of the organisation change over time – or high-risk events such as the pandemic continue to emerge – the board’s composition should also change to ensure it has the necessary skill sets, perspectives, and networks of the future. Term limits provide the mechanism to enable this change. With the number of boards reporting no term limits trending downward since 1994, more boards are opting for the flexibility and strategic consistency they build into their organisations’ governance structure.