“More is not always better” may be more than a cliché when it comes to the overall effectiveness of corporate boards.
A recent analysis done by GMI Ratings, prepared for the Wall Street Journal, indicates smaller corporate boards (8-10 member boards) empirically outperformed larger boards (12-14 member boards) across 10 major sectors in terms of shareholder return.
While the analysis focused on companies with at least $10 billion in market capitalization, some principals and takeaways can be applied to smaller, local businesses, and not just to board operations, but also corporate governance.
An initial consideration is the logistics of communication and decision-making. Even assuming every board member is well-qualified to address corporate actions, which becomes less likely the larger the board, the ease with which seven people can discuss a course of action through emails, phone calls, meetings and various amounts of documents is substantially less than it would take 14 people to discuss the same issue.
More people involved in decision-making tends to increase the likelihood that one or more directors miss points of earlier discussion and then become involved in later stages of decision making, which then breeds repetitive and irrelevant points and arguments being raised despite efforts to address and resolve the same previously raised concerns.
The typical approach to minimize the logistical holdups intrinsic to larger boards is to rely on numerous committees so that various directors can focus on one or two segments of the business. The committees then make recommendations to the board to take action.Yet committee-laden boards tend to make other directors deferential to committee recommendations because the committee is perceived as the expert who did the homework.
The noncommittee directors are then more likely to become detached from that area of the company, making their role in the decision-making process more of a rubber stamp. Furthermore, the committees may tend to become more lax due to the fact that other board members are not actively challenging their recommendations, and the timeliness of reviewing and recommending ideas may also suffer.
A final concern with rigid, long-standing committees is factionalism can become ingrained in the board which tends to make clusters of directors vote in groups as opposed to making individually informed decisions. Research also suggests smaller boards are more likely to take important actions, such as terminating a poor-performing executive, than a larger board is.
Another less obvious consideration with board size is the impact on social interaction. Directors are less likely to offer opinions and become engaged in decision-making if there is not a comfort level speaking to the group at large.
A person is more likely to be intimidated by speaking freely or asking a clarification question in a larger group than in a tighter group. This potential reticence to speak is then exacerbated by the fact the individual’s ability to develop comfortable social relationships with every other board member takes more time and may be harder to develop the larger the group.
None of this is to say there are not valid reasons for having a larger number of directors, such as promoting community exposure and involvement with a larger board. A charity, for example, may want a larger board in part to help spread the word and encourage fundraising efforts, but this effect may be accomplished better by establishing a foundation board and maintaining a smaller governance board.
A larger board also can take proactive measures to address these concerns by rotating committee members at regular short-term intervals, by spending more team-building time together, and by requiring committee reports to be submitted well in advance of meetings to ensure sufficient time is provided for board members to review a committee’s recommendation and/or analysis.
The obvious downside to a smaller board is that each member would be responsible for more work which, depending on if they have careers or other commitments outside of their board role, can pose challenges. However, the lesson from the GMI analysis is smaller boards tend to be more efficient and produce better results. To the extent that a corporation has vacancies open on its board or is concerned with being bogged down by too large of a board, it is worth considering whether a slimmer board may improve corporate efficiency and effectiveness.
• Brad Stewart is an attorney with Zukowski, Rogers, Flood & McArdle in Crystal Lake. Stewart devotes most of his practice to corporate and local government law. He can be reached at firstname.lastname@example.org.