In The Boardroom, Size Matters

Too few directors can risk rubber-stamping and too many can spoil the soup. There is, however, a sweet spot that's usually just right for small to mid-size companies.

I’ve seen my share of boards and studied others through proxy statements. My takeaway: public companies generally have larger boards than those I’m accustomed to working with, perhaps driven by the complexities of the enterprise and the governance requirements that pertain. Most of the boards I’ve served were those of closely held/private corporations and the aggregate experience from them led me to conclude that size does matter.

Pick a number! I’ve experienced “rubber stamp” boards having but two or three directors; served on boards with as many as 10; and been part of non-profit boards that seated 30 or more.  Of those boards having a majority of executive team members instead of independent directors, though well intended, they generally missed the mark. Inevitably their focus on governance issues would slip into an operations review—a more comfortable place to be.

My conclusion and hardly an original one is that, for small to mid-cap enterprises, five to seven independent directors who have complementary skill sets and experiences can get the job done just fine.

Why is five-to-seven a sweet spot? First, consider the outliers.  Having fewer than five directors may not be sufficient to distinguish between traditional governance oversight responsibilities the likes of audit, compensation and governance itself. That said, if all shareholders are represented this is not as problematic as it could be otherwise—after all, they are the ones at greatest risk for matters of their own non-compliance.

More than seven directors generally overcomes the risks of blurred oversight responsibilities, which can happen when there are too few, but there are also risks when too many are seated around the table. Unwanted “subcommittees” can be spawned when two or three directors take an issue offline, feeling that their position at the table is not being heard, or worse, accepted. When such polarization sets in, it is almost always disruptive—and sometimes destructive.

My experience also is that more than seven directors can unwittingly contribute to inefficient communications. With eight, nine or more at the table, it’s human nature for a director to feel a need and a duty to earn his or her pay and the best perceived way of doing that is to be heard. When that happens, focus can wander, simultaneous conversations can be spawned and what I think of as the “rhythm” of the meeting can be broken.

I often tell the story of a statement made by the last person called to the microphone at a community meeting I attended.  His opening comment: “I guess everything that needs to be said has been said, but not yet by me!” He then proceeded to voice his opinions, many of them repetitive, though perhaps more eloquent, than those expressed by the speakers who preceded him. Such also is a risk when too many are seated in the boardroom.

Yet another of the many lessons I’ve learned: if you need to add or replace directors, do so one or two at a time. On one board I saw four added simultaneously and that led to a polarization of “old” and “new” instead of the melding of both. Consider as well asking board candidates to serve as paid advisors for a few meetings, an opportunity for the board to see the candidates in action and vice versa, then followed by nomination and election.  Less chance of “buyer’s remorse.”

Five to seven board members: with governance matters attended to, the most productive and best use of their time is when, in concert with the CEO, openly, candidly and non-redundantly, they discuss all matters of opportunity and concern with few if any time constraints. A common interest, mutual respect and the blending of diverse experience and expertise in the boardroom will always lead to better outcomes for the enterprise served.

Fred Engelfried
Fred Engelfried is Director/Chair of North Coast Holdings, Inc. and its subsidiary Lewis Tree Service, Inc. He has been a member of the board of directors of Lewis for over 20 years, and for 10 years prior to that worked with the company intermittently in various consulting capacities. He also is President of Market Sense Inc., a participative management firm that has served more than 100 regional clients over 35 years.