Determining the optimal board size for an organisation is a delicate balance. Companies must consider the requirements that they have of directors, in terms of the range of skills and experience they offer, with the effect that larger boards will have on boardroom dynamics.
Small boards may lack the dissenting voices that are required for rigorous decision-making, but a large board may also be far from optimal. A study by Dirk Jenter, Thomas Schmid, Daniel Urban for the London School of Economics found that, for German firms that are subject to board size requirements, having “excessively large” boards can reduce the performance and value directors produce.
That said, historically, there have been some very successful companies with big boards, as evidenced by the Harvard Business Review.
Essentially, there is no such thing as the ideal board size. There is only the ideal board size for any one particular organisation, based on its unique requirements and situation. This article will help you consider board size optimisation for your business to find out what works and ensure the most effective functioning of your directors.
The importance of finding optimal board size
The guiding principle for boards is that the assembled team that comprises your board and its committees should have a combination of skills, experience and knowledge.
In order to run a successful board, you need to find the sweet spot in terms of the number of board members so that all directors remain engaged, that there are always counterpoints to discussions that help consider issues more robustly, that there is diversity of thought, experience and background, and that the boardroom is a constructive and productive environment.
The size of your board, as well as your recruitment processes, both help you achieve this aim for your individual set of circumstances.
How to determine optimal board size
Define the purpose and scope of the board
The board of directors’ overarching responsibilities are to identify the strategy of the business and to monitor how that strategy is being implemented. But, within that, it must decide how to balance its governance, advisory and operational duties.
To do this, directors must understand the unique position of the company, including the risks that are most pertinent to both the business itself and its sector. Furthermore, you should consider the regulatory requirements on the business, the strengths and weaknesses of the management team and what investors require from the company.
Assess current and future needs
Once you are clear on the scope of the board’s work, it becomes easier to consider the expertise you will need to deliver on that scope. Think about the situation as it is and which skills you require immediately in order to ensure effective meetings. But also, consider the future too and which skill sets will be of importance as the sector progresses and the company grows.
For example, you might need a financial expert on the board of directors, some members with in-depth knowledge of the industry, legal experts, cybersecurity advice or anything else that will help your directors guide the company around the potential pitfalls to success.
Consider legal and regulatory requirements
It could be that your jurisdiction has rules over the maximum or minimum size that a board can be. In addition, there may be laws about who must sit on a board, which will also have some bearing over the ultimate size of the board.
- In Germany, as previously mentioned, the rules require firms with 2,000 to 10,000 domestic employees to have at least 12 directors, 16 board members for those with between 10,000 and 20,000 employees, and 20 directors for larger companies.
- In South Africa, public companies must have at least three directors. However, the country’s King III report on corporate governance recommends there are more non-executive directors than executives, meaning that a board with a CEO, CFO and COO would need to appoint four or more independent directors, bringing the size to at least seven in total.
- In the Netherlands, large companies must have at least three non-executives in addition to the executive board members.
- In the UK there is no set number, but the UK Corporate Governance Code states: “The board should be of sufficient size that the requirements of the business can be met and that changes to the board’s composition and that of its committees can be managed without undue disruption, and should not be so large as to be unwieldy.”
There may also be stipulations on board size in your company’s byelaws.
Evaluate current board composition
If your company currently has a board of directors and you are looking to reassess its composition, you need to evaluate a number of factors to ensure you find the optimal size.
Consider the skills that the board possesses already and where skillsets overlap. Think about those elements of expertise you need to add to the mix, and this will help you gain insight on how big the board should be.
Analyse the effectiveness of your board and its meetings, using metrics such as members’ attendance, contribution, how many documents they open and how engaged they are with the work of the board. Using iBabs’ board portal, your dashboard will help you track this data and allow you to see where you must strengthen your team.
Consider diversity and inclusion
An essential role of the board is to indulge in critical thinking and challenge the perceived norms. If your board directors are all from the same background, there is less likely to be as much diversity of thought as there would be when boards comprise people with different experiences that they can bring to the table.
When there is a problem to overcome, the more varied the solutions offered, the richer the debate, which allows for better problem-solving than when members are broadly in agreement from the beginning.
Many jurisdictions are also creating legislation on the diversity of boards, with the European Union stating that, by 2026, companies will need to have 40% of the underrepresented sex among non-executive directors or 33% among all directors. The Parker Review Committee in the UK has set targets for private companies to have at least one director from an ethnic minority on the board by 2027.
How and when to resize your board
There are a number of reasons you might choose to change the size of your board.
- Reasons to increase the number of board directors could be due to a skill gap, after a period of growth, your current board is at risk of burnout from overwork or if you are legally obligated to.
- Reasons to decrease the board size could include members not fully contributing to the work of the board due to poor attendance or engagement, when some directors’ only duties are to come to meetings, or when it has become difficult to make personal connections between board members as a result of the number of individuals on the board.
In order to change the size of your board, you might need to adjust the company byelaws. This usually requires a vote at the AGM. It is advisable to add an optimal range into the byelaws rather than a specific number for the size of your board, as any unexpected departure or urgent recruitment would see you contravene the byelaws in the future.
Pros and cons of smaller vs larger boards
|Size of board
|With more members on the board, it is easier to distribute the workload so that directors are not overworked.
|There may not be enough meaningful work for each member, leading them to disengage from the board.
|Investor relations and outreach become less of a burden when the responsibility is divided among many members.
|It is more difficult to grow strong bonds with colleagues and facilitate meaningful conversations.
|More perspectives are represented in a large board.
|There is the possibility that cliques and core groups appear, undermining the collaborative spirit of the board.
|There is often more expertise to bring to the table.
|There is a danger of loss of individual accountability.
|Communication within the board is easier to conduct, as a tight-knit team can form strong bonds.
|The weight of the workload on the shoulders of just a few directors can be burdensome.
|Individual directors feel that their contribution is meaningful and creates a tangible difference to the business.
|Meeting investors and other stakeholders takes up more of each individual’s time, as there are fewer members to attend such events.
|Discussions are shorter and voting happens more quickly to make decisions.
|There may be a lack of representation of certain types of expertise or experience.
Common misconceptions about board size
- Myth 1: More board members mean better decision-making
Bigger boards can often become mired in long conversations, delaying decision-making and reducing the effectiveness of the board.
- Myth 2: A smaller board is always more efficient
Smaller boards can get more done, but they could also lack the necessary dissenting voices or the devil’s advocate that encourages them to be more creative in their problem-solving.
- Myth 3: There is a one-size-fits-all approach
No two companies are the same, no two situations are the same and, therefore, no two corporate boards should be the same. They should reflect the company and its individual circumstances.
Can an optimal board size change as the company evolves?
Yes, it can and likely will change based on various factors like company size, risk outlook and firm performance.
Are there any legal minimums or maximums for board size?
It varies depending on the jurisdiction and the type of organisation. Check with your local laws to understand the parameter requirements for your board.
How do I address resistance when changing board size?
Open communication with members and offer clear justifications for the change. Bringing in a third-party mediator can help with disagreements.
How often should we reassess our board size?
At least annually, or when there are significant changes in the organisation, such as mergers or strategic shifts. You should continually monitor the effectiveness of your board and consider if resizing is the solution to improving firm performance.
The optimal board size depends on the company and where it stands in its sector, as well as what is prescribed in the byelaws or national legislation. Getting the right number of directors is a challenging task, but by understanding the aims of your organisation and the levels of engagement within the board, as well as forecasting future risks and opportunities, you can select the best-qualified board for driving your organisation forwards.
Whether your board is large or small, communication is key to productivity. iBabs board portal helps you streamline director communication, ensure everyone has the documents they need on time and measure director engagement, amongst other things. Request a free demo of iBabs here.