We find term limits are the rule rather than the exception at most private clubs. Modern corporate best practices usually include term limits as a method to infuse fresh blood and ideas into the governance process. Considerable thought has been devoted in recent years to whether term limitations are effective in maintaining the vitality of nonprofit boards.1
The Proposed Model Nonprofit Corporation Act2 in Section 8.05. TERMS OF DIRECTORS GENERALLY recites (a) The articles of incorporation or bylaws may specify the terms of directors. If a term is not specified in the articles or bylaws, the term of a director is one year. Except for directors who are appointed by persons who are not members or who are designated in a manner other than by election or appointment, the term of a director may not exceed five years. [Italics supplied].
We generally recommend three year terms with the right to serve for two successive terms. However, we find there is no hard and fast rule. The idea is that if a director has proven to be a useful contributor and shows continued enthusiasm, there is no reason to require the director to step down after only a one, two or three year term provided the applicable statute permits. Dividing the board into classes, in which , e.g., one-third or one-fourth (depending on the size of the board) of the board runs or stands for election or reelection each year, is an way to revitalize the board.3 We find the three or four classes election cycle to be useful and appropriate for private clubs.
In those cases where a director desires to continue past the five or six, (i.e., two consecutive here year terms), continuous maximum term(s), a one year hiatus in service may be required to enable the director to seek renewed service in the future.4 We have experienced former directors being re-elected some years after their initial service and the club appears to benefit from the historical perspective of directors with tenure reaching
1 Cion, Development of An Effective Board, Nonprofit Governance and Management, pp. 61 et
seq. (American Society of Corporate Secretaries and American Bar Association 2002) (hereafter
“Cion”).
2 (Third Edition February 2006 Exposure Draft) American Bar Association Section on Business
Law Committee on Nonprofit Corporations (hereafter, “ABA Model Act”)
3 See Cion at 69.
4 Id.
back over a number of years preceding the terms of other current board members.
Term limits are most necessary when the board lacks effective leadership or when dominant leadership seek to perpetuate itself and the board lacks intelligent and effective opposition. Because nonperforming and perhaps obstreperous persons are relatively rare, each organization should consider the advisability of limitations created to free the board of difficult, long-term entanglements . . .
There is a debate, however, about the validity of per se board and officer term limits. As board evaluations become more common and more sophisticated techniques are developed for rating the effectiveness of directors, focusing on contributions rather than mere length of service begins to make more sense-particularly if the evaluation system requires increasing contributions to the board with longer service.5
Of course, the debate only is legitimate if an evaluation and rating system is in place for current directors. We find evaluation and rating systems only beginning to take hold in the private club arena. In the absence of effective and honest evaluation and rating systems, we believe term limits are both desirable and in some cases, necessary.
In today’s enhanced corporate accountability environment, especially with the advent of SOX and related case law and state statute imposed liability exposure, the importance of intimate familiarity with the new ground rules becomes evident. New directors, if properly oriented, may be more likely than longer term directors, to focus on and be attentive to the new rules of comportment, e.g., whistleblower rules, document retention and destruction, and audit requirements.
5 Cion at 70.