While it’s one of the most vexing and hotly debated topics in governance circles, a growing mountain of research suggests we’re dealing with what Al Gore might well term another “inconvenient truth”.
I’m referring to the size of a board, what effect it has on the performance of the entity and whether there’s such a thing as an optimal number of directors.
— Governance Matters (@GovernanceMatt) February 14, 2018
In recent years, research across the globe has tended to find that small is good. There’s the 2016 study by Pascal Nguyen et al entitled ‘Board size and firm value: evidence from Australia’ that, using a large sample of Australian firms over the period 2001 to 2011, found strong evidence of a negative relationship between board size and firm value.
So too did the 2005 ‘Is Out of Sight, Out of Mind?’ empirical study of social loafing in technology-supported groups, reporting that “Our results—in line with Social Impact Theory (SIT)—indicate that small groups, signifying a small dilution effect, had increased individual contributions and better group outcomes compared to their larger counterparts.”
And closer to home, a Thomson Geer Lawyers study found that large boards often become an information-receiving group rather than a decision-making board, that they tend to abdicate responsibility to a smaller group and create inner cabals that are often counterproductive, and that decision-making can become too slow as they’re not nimble enough to respond to challenges.
These are just some examples, backing my own experience over many years, where I’ve found that more important than size alone is the need to ensure the board has the skills required and, importantly, the diversity to do the job – and that often comes in at about seven.
In fact, the best board I’ve ever served on had a similar number…and it hummed.
Why? Because everyone was always terribly well-prepared for the meetings, there was no hiding – or as it’s known, social loafing. Everyone also had the chance to have their say, it encouraged robust debate, it was easier for the chair to manage, and things got done.
So why do large boards continue to exist, perhaps even dominate?
— Governance Matters (@GovernanceMatt) February 19, 2018
There are myriad reasons, key among them historical and those related to representation.
The historical argument says “that’s the way we’ve always been, it works and if it ain’t broke, why fix it?” Interestingly, in one case when consulting to a fairly large board and sharing the benefits of smaller bodies and how we might get there, I suggested that when the next three positions came up for election, we’d just elect two…and keep at it until we reached our optimal size.
The directors were united in their praise, trumpeting it as a fantastic idea…but with one telling rider – not a good time right now as we’re in the throes of significant change. Of course, what they meant was ‘I want to protect my position; they can do this once I retire!’
Representation can be particularly thorny in not-for-profits where those elected tend to governance AND operational matters. Or, on a national scale where all the states demand representation…only for the larger ones to argue that as they have more members, they need more representatives. And before we know it, we’ve not only become cumbersome but have invited unwanted tension into the mix.
My advice to the more substantial boards is to have the hard conversation. If downsizing is the right thing to do, you have to be prepared to do it…and that means changing the entity’s constitution, doing the hard sales pitch and taking it to a general meeting to garner the required support to get it over the line.
In short, directors need the moral fibre to do the right thing.
Until next time,