When It Comes To Governance, Size Does Matter! (And Bigger Is Not Always Better!)

By: Dr. Chris Bart, FCPA, F.CIoD Chairman, The Caribbean Governance Training Institute & Chairman, Caribbean Institute of Directors

According to one major study, the average US corporate board size is 9.2 members. In contrast, the average for boards of all types (for profit, not for profit, association etc.) in the US is 17. Within these statistics, boards have been found to range between 3 and 30 members.

In theory, a board should be big enough to get the board’s work accomplished, yet small enough to communicate, deliberate, and act as a single body.

Interestingly, while acknowledging this maxim, most writers on the topic of board size seem to agree that a typical board of directors should be comprised not less than 5 members and not more than 15, with the ideal board size being 7.

So how many directors should you have sitting around your boardroom table?

Naturally, the real answer is: “It depends.”

The Case for Small(er) Boards By their very nature, large boards tend to be inefficient. That’s because when they meet, they usually entail longer and more protracted discussions with too many voices competing for attention and directors anxious to “make a contribution to the meeting”. It can become an unwieldly situation. Yet, ironically, members of large boards often complain that their opportunity for participation – to contribute their good ideas and exercise their leadership capabilities – is restricted. They feel left out of the decision making process which then leads to them feeling and becoming disengaged!

Therefore, to make the board more efficient, and because it’s usually difficult to bring all of the directors together (especially on short notice), a board will often agree to create an executive committee of 5-7 directors to carry out work on behalf of the full board. But then it’s not too long before the full board becomes an acquiescent, rubber-stamping body in relation to the “the real board” – the executive committee.

The full board now meets infrequently and directors who are not part of the executive committee feel ‘structurally disconnected’ from the locus of decision making power. As a result, both their preparation and attendance wanes and board disengagement soars!

Moreover, due to the infrequency with which they meet, it becomes almost impossible for large boards to develop the interpersonal relationships with each other – not to mention with their CEO – which many argue are vital for creating a high performing board that adds value to the organisation.

Interestingly, recent research has discovered that with every director added over a board size of 17, the quality of the board’s decision-making ability decreases by 10 percent. So if this is true, doing the math would mean that for the typical average US board size of 17, the quality of their decision making would be recorded at zero!

Taking a somewhat different approach, an analysis conducted by GMI of almost 400 publically listed corporations found that smaller type boards tended to enjoy significantly higher rewards for their shareholders than their larger board counterparts. The companies studied had an average board size of 11 which ranged between 9 and 14 directors. Smaller boards of directors were observed to outpace their peers by almost 9 percentage points, while larger boards underachieved peers by 11 points.

Interviews with the directors explained these results by noting that with smaller boards, a richer dialogue among the directors and management was encouraged. This in turn fostered more cohesiveness, decisiveness and agility in the board’s supervisory functioning. There was also more effective oversight of management – especially the CEO – with smaller boards being more willing to sack poorly performing CEOs for lackluster performance, something that gets more and more difficult to do as board size increases.

So on average, it would appear that bigger is not always better and that good things do come in small packages. However, beware as you contemplate downsizing your board. There will be serious turf issues at stake as board members jostle to see who gets a seat when the music stops. As with all major change initiatives, and this is a big one, it will be extremely important to lay a proper foundation in terms of getting the board ready for such a change and managing it without bruising egos or making enemies. So be prepared. Downsizing properly can take years!

The Case for Big(ger) Boards Notwithstanding the previous arguments, there is still a case to be made for having larger sized boards because they too provide certain benefits. At the top of the list is the fact that big boards offer greater diversity of thought as well as the horsepower to sustain a rigorous dialogue around each of the board’s various agenda items. Larger boards also allow for the inclusion and presence of certain directors by virtue of their geographic location, ex officio status, or ‘stakeholder’ representation.

To minimise their limitations discussed previously, effectively functioning large-scale boards like to make use of many committees with five to seven directors appropriately assigned to each one. The committees do all the heavy lifting on topics that fall under the board’s purview: audit, finance, human resources, compensation, governance, risk etc.

Under these conditions, directors report feeling engaged due to the specialised contributions they make to the full board via their specific committee. And because of the rigor that these topics get from the highly focused and aligned attention of the committee members (and often supplemented with outside professional expertise), the full board does not have to rework the agenda items (called “double due diligence”) when they come up for final review. This helps make the full board act more efficiently when they meet.

Not surprisingly, the quantity of work faced by bigger boards does not get reduced for smaller ones. Smaller boards face the same volume of responsibility and liability as do their larger counterparts. It’s easy therefore for the directors on small sized boards to become overwhelmed by their tremendous workload – which, in turn, can also lead to board disengagement.

To alleviate this problem, and especially if the directors want to avoid having to do double duty on multiple committees that require specialized expertise, small boards start adding directors to their ranks thereby setting them on a path to “bigness”. And so it goes.

In conclusion, all organisations are not the same. They come in a multitude of varieties – for profit, not for profit, associations, charities, state agencies etc. Accordingly, the nature of the circumstances surrounding an organisation will significantly influence the size of its board.

I have given you the cases for both smaller and larger boards. In both instances, directors want to be meaningfully consulted and not have their talents dissipated. It’s also my view that the average size of boards is slowly shrinking. However, the ultimate decision on which size is right for your organisation rests with finding the number of directors that (a) allows your board to competently and diligently carry out its many demanding responsibilities while (b) not damaging the quality of its decision making due to having either overburdened directors or disengaged ones. No outside expert can make this determination for your board. So here’s the big, uncomfortable question for Caribbean directors: To what extent do you and your fellow board members think you have the right board size? If you think that there is room for improvement in the way your board is structured – one of your many critical governance decisions – you might want to consider sending them to one of the corporate governance training programs available in the region – like the extraordinarily unique 3 day Chartered Director Program (“C. Dir.”) currently being offered by The Caribbean Governance Training Institute. After all, it’s not education which is expensive, but rather ignorance.

Written By
More from Admin

Loan Approved for Choc Bay/Gros Islet Highway Improvement

Parliament authorized the use of the Kuwait Fund for Arab Economic Development...
Read More