Tag Archive: Professor Bainbridge

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