Tag Archive: Board size

Going Private?

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In 2012, initial public offerings (IPOs) did not quite make the rebound analysts had predicted. In the year of the botched Facebook offering, just 128 IPOs were made. Although quadruple that of 2008, this marks a decrease from 154 IPOs in 2011. Last May, the Economist observed that this decline was part of a larger trend: the decline in popularity of the public company.

Since 1997, the number of U.S. public companies has fallen by 38 percent. Additionally, the average number of IPOs has declined from 311 per year between 1980 and 2000, to 99 per year between 2001 and 2011. In addition to companies actively not going public, in the last year several well-known businesses “went private,” such as Quest Software, CKE Restaurants, Burger King, and J. Crew.

In addition to the obvious distinctions of private companies—a lack of shareholders and adherence to regulation—NACD’s recently released 2012—2013 Private Company Governance Survey found many lesser-known differences. This survey features responses from over 550 individuals who serve private company boards. Some of the contrasts include:

Private company boards are smaller. On average, private company boards have 7.3 members—a decrease from 8.9 members in 2011. For the past several years, public company boards have consistently maintained an average of 8.8 members.

Public company directors are more likely to receive continuing boardroom education. In 2012, 82 percent of public company directors received continuing education in the last 12 months, compared to 57 percent of private company directors. This may be connected to company policy, however: 83.1 percent of public directors were reimbursed for education expenses, while only 54.5 percent of private company peers were.

Trend in the private company boardroom: D&O Insurance. Additional directors and officers liability insurance was obtained by just 15 percent of private company directors in 2008. In 2012, this figure jumped to 50.4 percent. In comparison, 42.8 percent of public company directors purchased additional D&O insurance in 2012.

Nominating and governance committees are much less prevalent at private companies. Similar to public company counterparts, audit and compensation committees are nearly ubiquitous at private companies. However, just 49.2 percent of private company survey respondents indicated that their board had a committee dedicated to nominating and governance.

Private companies employ different mechanisms to ensure director turnover. The most commonly used method of director turnover at private companies is director evaluation. Age limits and term limits are both used by nearly one-fifth of respondents. At public companies, the most prevalent mechanism to renew and replace directors is age limits, closely followed by evaluations. Term limits are used by just 6.5 percent.

Generally, private company boards maintain less diverse composition. Compared to 27.4 percent of public companies, 38.5 percent of private companies do not have any female directors. With respect to minority directors—based on race and ethnicity—70.3 percent of private companies have no such representation, compared to 51.8 percent of public boards.

NACD Insight & Analysis: When Is the Board Too Big?

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With increased scrutiny of corporate boards, it is only logical that attention be paid to one of the basics of boardroom composition—board size. Many high profile companies have made news recently for altering the size of their boards to include more directors with operational experience. Most notably, Japanese automakers Toyota and Honda have announced plans to shrink their boards from 27 to 17 members and 20 to 12 members, respectively. Both Morgan Stanley and Goldman Sachs added three new members to their boards, while Goldman Sachs concurrently shrunk its board to 11 members. Taking into account that the average board is 8.3 members, according to the 2010 NACD Public Company Governance Survey, what is the optimal board size?

There are many advantages to having a larger board. More directors can bring a greater wealth of diverse experiences to the boardroom, as well as a greater network of connections and resources. A larger amount of available directors can also allow for the board to staff committees without overlaps. However, a board that is too large can become unwieldy and ineffective. According to a post from Professor Bainbridge, large boards tend to suffer from fragmentation—reducing their ability to properly oversee management and efficiently make decisions. Bainbridge also notes a 1913 psychological study by Kravitz and Martin, which found that in larger groups the ability to measure individual productivity decreases. Therefore, “social loafing” becomes more acceptable, creating wallflower directors who do not pull their weight.

The same principles listed above apply to smaller boards. While fewer directors can bring less diversity of experiences and resources to the table, it is easier for a smaller group to communicate. Smaller boards offer fewer opportunities for directors to sit on the sidelines, encouraging all members to actively participate in decisions. The increased cohesion and communication, though, often leads to a higher possibility of groupthink. Directors on smaller boards should be especially aware of their responsibility to be constructive skeptics in boardroom decisions.

However, directors should understand that one size does not fit all with respect to optimal board size. Depending on many factors, including a company’s size, industry, strategic needs and stage in the business cycle, the amount of directors needed fluctuates. Over the years, our annual governance survey has found that by revenue, smaller companies tend to have smaller boards. Nonprofit companies also tend to have more directors—in 2009, the average nonprofit board had 19.8 trustees[1].

[1] According to the 2009 NACD Nonprofit Company Governance Survey