No board member should be grandfathered, guaranteed a board seat forever.
Practically speaking, this is an impossible goal. We have investigated the restrictions imposed by investment documents and the obvious need to keep continuity on the board with the retention of the CEO position at the very least. But it would be the best of form to require in the bylaws of a corporation that all seats are re-elected annually.
How about loss of institutional knowledge?
Well, here’s a problem that needs a bit of thought. If you elect your board members
annually and for some reason aggressively change members, you will experience the steep learning curve required to get the newest board members up to speed to contribute with deep knowledge of the company and of your management style. And that’s not good. Re-electing board members again and again is not a problem – if those re-elected members contribute effectively as they fill their seats. But annual re-elections signal to all that a board seat is not permanent or even long-term.
How about non-profit boards?
There are three types of members on non-profit boards, and the balance is critical. There are those with money to give or get, necessary for all non-profits. There are those with great community and industry contacts for finding honorees for events or bringing onto the board. And there are those with deep knowledge of the non-profit itself, always able to help when members without that experience make suggestions that may be impractical or tried before.
How about staggered four-year terms?
[Email readers, continue here…] That’s appropriate for non-profits for the reasons listed above. But I’d revert to the annual re-election habit for all but non-profit boards.
Why the difference?
For non-profits, this allows for the creation of a board development committee to find and recruit outstanding new board members and find ways to unseat those who are no longer contributing or even attending board meetings. Such a policy further reinforces the duty of care for the corporation by its board. Unseated board members with longevity and a history of participation can be invited to become “emeriti” members of the board with observation rights but no vote.
The annual shareholder meeting:
Although not required by all corporate bylaws, all companies should hold and document an annual shareholder meeting in which the shareholders are notified at least 10 days in advance and given the right to submit a proxy vote for their choice of officers and for any other issues that will come to a vote, including expansion of the stock option plan to include more available shares.
The bottom line is that good corporate governance calls for a skill set within the board that is not often present, but for the protection of members and the corporation itself, necessary.
