What is the ideal board size?
Monday, 26 March 2018
There’s no easy answer to this question. Boards must be guided by a number of factors in determining the optimal number of members they need to do the job.
By Parmi Natesan and Prieur du Plessis
Like most of the questions people ask in relation to good governance, and particularly in relation to the King Report on Corporate Governance, the answer to this one is, It depends. This is in line with King IV’s principle “Apply and explain”: a good governance code must be flexible enough to allow the board to put the most appropriate measures in place to achieve the desired outcomes ̶ provided it explains its logic.
When it comes to board size, there is some research to back up the view that smaller boards perform better than large ones in the main. PwC’s Non-executive directors’ practices and fees trends report for 2014 shows that the majority of JSE boards have between three and seven members. In the United States, according to November 2015 research “Does Optimal Corporate Board Size Exist?”, the most common board size for publicly traded companies ranges between eight and 11 directors.
Most interestingly, it appears that US companies with fewer board members produce better returns for shareholders, according to a 2014 study by governance researchers GMI Ratings prepared for The Wall Street Journal.
One reason for this could be that smaller boards can support a collegial, collaborative environment. Directors will find it easier to contribute, and assertive directors will be less likely to hold the floor. The chair will be better able to identify those who are side-lined, and solicit their participation. Board members are likely to enjoy themselves more, and thus to give that little bit extra ̶ even if it is subconsciously.
On a more mundane level, smaller boards are easier to manage simply because there are fewer people, and fewer schedules to coordinate. The fee bill is correspondingly smaller too!
Conversely, bigger boards may be harder to manage, and shyer or less well prepared board members can sink more gracefully into the background.
No silver bullet
However, we repeat, there is no magic number that will guarantee a well-functioning board. The board must exercise its collective mind in coming to a conclusion about what its optimal number of members should be. Some considerations would be:
- What skills the particular company needs. For example, a company facing multiple lawsuits or intense competition, or wanting to expand into a new market might require a broad set of skills. Different industries also require different skills. For example, a company operating in a highly regulated sector like mining or banking might need a bigger range of specialist skills than one in the hospitality industry, and thus might have a bigger board.
- The size of the company and its geographical footprint would also be part of the equation.
- The need to strike a balance between executive and non-executive directors is critical in terms of good governance, and would necessarily impact board size. King IV recommends that the majority of the board should be non-executive, and mostly independent.
- Is the board diverse enough not just to satisfy South African regulations but, more importantly, to enable it to guide the company effectively in a highly complex business, social and political environment?
- Are there sufficient skilled people to participate in the requisite board committees? The Companies Act stipulates at least an audit committee and a social and ethics committee. Bigger companies are likely to conclude that they should also have standing risk, remuneration and nomination committees. Following King IV’s principle of proportionality, smaller companies might not constitute formal committees.
The spirit of King IV is what should guide us. In this light, then, while one might believe that a lean board has intrinsic advantages from many practical points of view, the key criterion must be to ensure the board has the right mix of skills, knowledge and experience to guide a particular organisation in a particular sector at a particular time.
Parmi Natesan and Dr Prieur du Plessis are Executive Director: Centre for Corporate Governance and Chairman of the Institute of Directors (IoDSA) respectively.
Better Directors. Better Boards. Better Business