Rotation of Directors: Ounce of Prevention, Pound of Cure

August 2010

Many organizations find it useful to provide for a rotational board, that is, a board on which a specified fraction of the directors is elected at each Annual Meeting, for a term of multiple years. For example, half are elected each year for a term of two years; or one-third are elected each year for a term of three years.  The goal is to avoid a situation in which the entire board is replaced in a single year. The electoral cycle ensures that the board retains continuity but also provides for renewal.

The cycle, however, is interrupted when a director resigns from office before the end of his/her term and another person (the “replacement director”) is appointed or elected to fill the vacancy. In our experience, what frequently happens is that the replacement director is appointed or elected for whatever term of years has been selected for the electoral cycle (two or three in our example). What should have happened is that the replacement director was appointed or elected for the balance of the unexpired term of the person he/she replaces. Further resignations and replacements progressively compound the error, creating, in a very few years, an enormously tangled web that is difficult to un-weave.

The un-weaving solution is sometimes complex and time-consuming, but more likely achievable when all the persons who are – and especially those who have been – directors are alive, capable and cooperative.  Sometimes it is necessary, particularly where the tangled web is more complex or where there is a lack of cooperation of (usually the former) directors, to take a calculated risk that an imperfect and in fact incomplete un-weaving solution is the best that can be done.

As with many things, an ounce of prevention is better than a pound of cure. The prevention of inconsistencies in terms of office in the rotational cycle is much easier than any formula to resolve such inconsistencies. So we offer the following illustration to help in providing that ounce of prevention.

This illustration assumes that the corporation has nine directors, and that the term of office of each director is three years. It also assumes that the corporation has a rotational board in which each year, three directors retire and three directors are elected (or re-elected) to replace the retiring directors.

In Year 1, in order to begin the rotation, three directors are elected to serve for one year, three directors are elected to serve for two years, and three directors are elected to serve for three years. In Year 2, and each year following, the terms of office of the appropriate three directors end, and to fill their respective “slots”, three directors are elected (or re-elected) for a term of three years.

Thus, at the Annual Meeting each year (after the annual meeting when the rotation is started), each “slot” is filled by the election (or re-election) of one person as a director for a term of three years.

If the person occupying a “slot” resigns or retires before his/her term of office has been completed, there is a vacancy in his/her slot, and his/her replacement (sometimes by appointment, sometimes by election) fills his/her “slot,” but only for the remainder of the time left in that “slot”. At annual meeting at the end of the time remaining in that “slot”, that person (or another) is elected for the three-year time “slot”.

Year 1Year 2Year 3Year 4Year 5Year 6Year 7
Mary electedMary electedMary elected
John electedJohn electedJohn resigns
Charles appointed
Charles elected
Peter electedPeter electedPeter electedPeter resigns
Paul appointed
Sally electedSally electedNora elected
Irene electedIrene resigns
Nick appointed
Nick electedNick elected
Gordon electedGordon electedGordon elected
Patrick electedPatrick resigns
Julia appointed
Julia electedNadia elected
David electedDavid electedDavid resigns
Emily appointed
Emily elected
Brenda electedBrenda electedRick elected

If it is too late for your organization to be able to adopt the ounce of prevention, we at Miller Thomson have experience in providing the appropriate pound of cure.

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