How Big Is Too Big?
The best boards closely monitor their director count.
The median number of board members in the Russell 3000 has remained stable over the past five years, growing from 9.0 in 2016 to 9.1 in 2020, according to Corporate Board Practices in the Russell 3000, S&P 500 and S&P MidCap 400: 2021 Edition. But that median number hides the fact that the number of companies with smaller boards (fewer than six directors) declined, while those with larger boards generally increased in percentage.
Given that median board tenure over the same period barely declined (from 11 to 10.7 years), and that many companies are striving to improve gender and ethnic diversity on their boards, one would expect that larger boards would grow even larger. But can there be too much of a good thing? What’s the optimal size for a board?
Norman Augustine, retired chairman and CEO of Lockheed Martin, says that the most appropriate answer is probably that “no one size fits all.” To illustrate that thought, he points out that for boards of large companies, 12 members seems like a correct size. But, to him, 12 board seats would seem unwieldy for a small firm or a start-up. He believes for those businesses a five-member board works well. Overall, he says, “A board needs to have enough members that, if one or two encounter circumstances that preclude their attending a particular meeting, there are still enough members present to assure a thorough vetting of the issues at hand.” He also points out that an odd number of board members can be valuable to ensure a minimum of tie votes, but that “if the board commonly has tie votes, it has a bigger problem than the size of its membership.”
Adis Vila, an independent director and president and founder of Vila & Associates, agrees that different-sized firms need different-sized boards. She believes nine to 12 directors are ideal for a company with revenues between $1 billion and $3 billion, while seven to nine members works for companies with less complex business dealings. However, she did identify a scenario in which it would be acceptable to house a surplus of directors in one boardroom.
“If the firm anticipates retirements or is looking to have a more representative board, I believe a larger board for a set number of years to accomplish such goals is acceptable.”
Perhaps more important than the size of the board is making sure key roles are occupied. Evelyn Dilsaver, chair of the audit committee for Ortho Clinical Diagnostics, Tempur-Pedic and Health Equity, identified the key roles as chairs of major committees, such as audit, compensation and human resources, and nominating and governance. She also states that the best companies are forward-focused, adding committee chairs in areas with a growing impact in the business landscape, including compliance and risk and technology. Grace Lieblein, who sits on the board of directors for American Tower, Southwest Airlines and Honeywell Corporation, concurs. “That is where the best boards stand out. Those boards look ahead to the company’s future strategy and assess current board members against it. Gaps that are identified then become part of the board succession plan.”
Looking for something to do
When there are too many people on a board, there is the danger of “looking for something for people to do,” which could introduce roles that are not necessary on the board. Lieblein has seen this phenomenon not with roles, but with committees that have lost their usefulness. “I have seen the need for certain committees come and go, depending on the situation with the board and the company. Effective boards take action when committees become unnecessary and phase those out.”
Augustine says it’s more a matter of unnecessary directors than unnecessary roles. The board member he suggests you look out for? The single-issue director who is overly committed to holding the line on a controversial topic. “Members should be highly ethical, have sound judgment and be able to balance the various sides of complex issues. A board is not a debating society; it must be able to conduct thoughtful discussions among its members who will listen as well as share their views.”
One major effect that occurs when a board is too large is the inability for directors to have their voices heard. Lieblein says, “A very large board runs the risk of lack of engagement by the directors. It becomes more difficult to have good dialogue at a board meeting.”
Augustine believes that a board with too many members inevitably becomes ineffective and bureaucratic. “Having members who believe that they must have something to say on every matter, even after everything has already been said” results in unproductive meetings.
He also points out that having too many members on a board can lead to an erosion of personal dynamics. A large board often results in the executive committee taking over the role of the board to ensure that important tasks are accomplished. “This usurping of authority produces a backlash from the remaining members, who rightfully believe they are being silenced and are therefore unable to carry out their fiduciary responsibilities.”
For Vila, the number of directors on the board is not as important as making sure that the relationship between fellow board members and between the board and management is closely monitored. She says that one of the lead director’s most important roles is making sure all members communicate respectfully and have an opportunity to contribute.
“Directors who monopolize conversation; disrespect fellow directors, the CEO or the firm’s executives; and come to meetings unprepared should not be reelected to the board,” says Vila. “Annual evaluations that take on the 360 approach, so that each director gets a thorough review of his or her contributions, are a must.”
Timeline for board rightsizing
The nom/gov committee often starts with the best of intentions when it ends up with a too-large board. Augustine, Lieblein, and Vila each point out that nonprofits are often plagued by overly large boards because of their desire to represent important stakeholders or ensure appropriate fundraising. As an example, Augustine says that when he was chair of the American Red Cross, the board hit a whopping 52 members at its high-water mark. Public company boards, like their nonprofit counterparts, can become overpopulated for positive reasons. Vila says it’s acceptable for a board to raise its numbers because a member is preparing to retire or to meet its diversity goals. But, she adds, it’s necessary to set a time for when the amount of directors should be reduced. “The board should ensure that a time limit is discussed and that there’s follow-through to ensure those timeframes are met.”
Every so often a board simply needs to bring in new perspectives, a step that Dilsaver says can lead to too many board members. “In the case of a refresh, boards will add additional members to allow for the transition and transfer of institutional knowledge. A board can also have too many members when they add new capabilities but are reluctant to ask someone to step down.”
While it is difficult to ask a long-term board member to step down when the number of directors grows too large, the benefits can be immense for boards. It is often easier to maintain a collegial nature with a smaller, more intimate group, and both Augustine and Vila suggest that a friendlier board equals a more productive board. To Vila, “It’s important to have a collegial board that reflects the stakeholder base and represents the skills required to exceed the strategy set out by the firm.”
Augustine has observed that boards work best when members know each other well and can disagree with each other in a way that leads not to arguments but to insightful decisions. To underline the value of camaraderie, Augustine spotlighted his service on a working group of NATO. Language barriers and the observance of customs of far-flung nations led to a slow, awkward first meeting. Then, someone suggested the group have dinner at a restaurant. “We shared stories about our life experiences, our families and our hopes for the world. The next day, our meetings took on a totally new ambiance and progress moved at an altogether new pace.”
A board that has gotten too sizeable can be restored to a smaller, more manageable number. Dilsaver believes that the key is a strong board chair, combined with a diligent nominating and governance chair and a clear process for board refresh, focused on the strategy of the company and the skills and capabilities needed on the board. Another valuable tool? “Many boards are putting term limits into place and applying them to existing directors, with a transition plan to replace those whose terms have expired. It’s easier to have a discussion with a board member whose time is up, as long as they view it as applying to all equally.”
When boards monitor the efficiency (and economy) of the board, Lieblein believes it is essential to have a mechanism in place that tracks the current skills and expertise of the board. “A skills matrix of current board members is a helpful tool for the board to understand where there may be ‘too much’ experience and where there are gaps. Then it’s up to the lead director, the nom/gov chair and the board chair to take action to realign the board.”
Rather than focus on what needs to be done to streamline unwieldy boards, Augustine points to one positive of well-run boards: They have a tendency to fix themselves. He says that members of boards that are too big usually can recognize that as the case and agree to reduction over time, often in the form of retirement by longer-serving members or resignations by members with other pressing needs to tend to.
“Each of the boards in my experience that were of unwieldy size were ultimately streamlined. The reductions were implemented over time.”