Creating and maintaining a well-functioning board of directors is one of the most crucial components of a credit union’s success. It’s also one of the most challenging. Term limits are an especially polarizing issue — with the potential to impact a credit union in both positive and negative ways.
In either case, the option is gaining traction. A 2005 report from the Filene Research Institute found only 15% of credit unions surveyed had term limits. By comparison, a 2012 study from the Clarkson Centre for Board Effectiveness and CUES found 28% of credit unions surveyed had them.
Here are three potential pros and three potential cons that term limits present.
1. Increase Board Diversity
Age can be a sensitive topic for credit unions to address. For this reason, less than 2% of credit unions force mandatory retirement based on a board member’s date of birth, according to Filene.
However, in order to maintain relevancy, credit unions need to build a board that is representative of both the membership it has now and the membership it wants to have down the line.
In a 2012 CUNA whitepaper, only 6% of board members surveyed were younger than 40 and a mere 1% were younger than 30.
In addition to addressing the need for younger directors, credit unions must also tackle ongoing board issues such as gender disparities and director concentrations from certain SEG groups. During its study, CUNA discovered male board members outnumbered female board members three-to-one, and the 2010 Filene study found 75% of directors came from a credit union’s original sponsor company.
Without terms limits in place, credit unions have fewer tools and opportunities at their disposal to address diversity issues.
2. Encourage Participation And Transparency
According to Filene, nominating committees are the primary method for board candidate selection; however, survey respondents also relied on recommendations from the CEO (33%) and existing board members (62%).
Credit unions should use every resource at their disposal to find qualified directors. But credit unions run the risk of discouraging participation and weakening enthusiasm among other qualified candidates when incumbents or hand-selected candidates consistently dominate elections. Electing candidates to the board because they were unopposed or had an unfair advantage doesn’t equal real democracy.
The board's nominating committee is becoming a rubber stamp of the management. They will interview you, but they have their own candidates lined up." — Satinder Arora, an IRS examiner who has unsuccessfully run three times for a seat on his Colorado credit union’s board, speaking to The Denver Post.
3: Prevent Burnout
There’s nothing more dangerous than a bored board. According to CareerBuilder, 77% of employees in the United States say they feel burned out on the job. And although a volunteer opportunity might provide these individuals with a welcome challenge outside their 9-5 occupations, the same factors that cause job burnout can disenfranchise long-term board members. Putting term limits in place can counteract this by preventing these individuals from running themselves ragged.
4 Signs A Board Member Is Burned Out:
Pessimism — Board member is quick to find fault and blames other people or external circumstances that cannot be changed.
Lack of Interest — Board member is slow to offer solutions or alternatives and has a “phone in” or “check the box” mentality.
Lack of Confidence — Board member rarely speaks up or challenges ideas.
Lack of Effort — Board member waits to be told what to do and rarely takes initiative.
1. Regulation Nation
Like all components of a credit union’s business, state and federal regulators closely monitor credit union governance. So to appease regulators and maintain continuity of governance, some credit unions are phasing interm limits over time, changing first the number of terms and then the length of a term. As a result, though, they might not be able to control the timing of the process as much as they want to.
Other credit unions are arranging term limits via voluntary, informal agreements with board members. But not every board will be open to this idea. The 2010 Filene study found that 53% of board directors disagreed with the idea of term limits while only 24% agreed. If issues or conflicts arise with even one board member during the transition, a credit union can find itself in legal mire relatively quickly.
2. Hurt Feelings
There are all types of board members, from those who view the role as more of a hobby or a social function to those who take the role as serious as their primary occupation.
In either case, members have sacrificed their own time and efforts for the cooperative cause, and the application of term limits might create feelings of failure or even abandonment. According to a study by the UK-based Institute of Economic Affairs, individuals are 40% more likely to suffer from depression after retiring from their primary job, and it’s possible leaving the board could have a similar effect on an individual.
If your credit union does adopt term limits, consider also creating emeritus roles and topic-specific advisory councils so talented former board members and members who cannot commit to a full-time board term can still contribute to the credit union.
3. Difficulties Attracting New, Qualified Board Members
According to the 2010 Filene study, only 25% of credit unions have a ready list of candidates for board succession purposes, and the addition of term limits can present a significant burden in terms of identifying replacements.
Pressures to fill the roster with high-talent, financially literate individuals has already lead some institutions to offer compensation for this traditionally unpaid role. Some in the industry do not agree with this direction, arguing it sets a dangerous precedent, incurs extra costs, and attracts the wrong type of individuals for a cooperative setting.
The volunteer composition of all boards is the single most important component to ensuring that the interest of the membership is what guides credit union decision making.” — Henry Meier, associate general counsel of the Credit Union Association of New York, in his blog New York’s State of Mind.
“The volunteer composition of all boards is the single most important component to ensuring that the interest of the membership is what guides credit union decision making. I don’t want someone on a board who is doing it for the money or, worse yet, is doing it because he or she needs the money. I want someone on the board because they believe in what the credit union stands for and want to help out their local colleagues, association members, or community.” — Henry Meier, associate general counsel of the Credit Union Association of New York, in his blog New York’s State of Mind.
Yet in a world where time is at a premium and members are pulled in more directions than ever before, some credit unions feel a financial incentive is exactly what’s needed to secure the type of engagement they need. When turnover does occur, they may argue, the money previously spent on board education or training is effectively lost, so why not spend additional funds to keep board members around?
Term Limits Are An Answer, But Not The Answer
Implementing term limits for the board is one way a credit union can keep directors engaged, but there are other ways of doing it, including altering the board structure, adding external and internal performance reviews, and offering additional training or access to industry events. However you choose to do so, your strategy should keep board members feeling challenged and appreciated, regardless of their tenure.