There’s no hard-and-fast rule for the size of the ideal board ̶ it always depends on the organisation and its needs.
Board composition goes to the heart of a board’s performance. Who is on the board, the skills they bring, and how they interact with each other are all factors that affect the board’s ability to set a winning strategy and ensure it is followed. But, of course, we all like easy answers, and the tendency to look for the silver bullet seems to be a human characteristic. There seldom is one, though, and certainly not in this case.
As always, the King IV Report on Corporate Governance for South Africa offers good guidance even though it does not address the question of board size directly. Principle 7 should be the lodestone: The governing body should comprise the appropriate balance of knowledge, skills, experience, diversity and independence for it to discharge its governance role and responsibilities objectively and effectively.
In short, boards need to be constituted in a way that maximises their contribution to the organisation’s sustainability.
That said, there has naturally been quite a lot of research into the magic figure, which seems to conclude that ideal board size depends on the size of the organisation itself. For large, listed companies, 8 ̶ 12 directors is typical, while for medium-sized companies 6 ̶ 8 is usual. Smaller listed companies range between four and six directors. Slightly different ranges apply to NGOs and non-listed companies.
Overall, there’s definitely a trend towards smaller boards. Smaller boards are more active and collaborative, and make decisions more quickly. Research does seem to indicate that companies with smaller boards have better returns than those with larger boards.
But, as we’ve said, it all depends. Here are some of the issues an organisation needs to consider when deciding how many people it needs on its board:
What skills does the organisation need? This is the fundamental question. Perhaps the best advice is that the board should undertake a study of what the precise skills it needs are, given the sector and the strategy. This is a process that should not be skimped. Board performance assessments should be used to gain an objective view of how the board is currently performing.
In the digital era, the inclusion of directors with technology expertise becomes crucial, as they can guide digital transformation strategies and cybersecurity measures, significantly influencing the board’s adaptability and resilience.
Does the board have enough independent directors? King IV argues that a majority of the board members should be non-executive, and that most of these should be independent. Research by Korn Ferry, an executive search firm, indicated that out of 10 directors, eight should come from outside the company ̶ a proportion that seems about right to us.
Can the board constitute its committees properly? Board committees have important roles and the board relies on them for its oversight function. The board has to have enough people with enough time to participate in these committees ̶ a smaller board could risk overstretching its individual members.
Are the directors professionals? Given the huge demands placed on directors, a big trend has been to professionalise directorship. The IoDSA has led the charge in South Africa, and now offers two professional designations, Certified Director and Chartered Director. Professionalisation means that directors can acquire the range of skills they need to fulfil their expanding role methodically. Professional directors by definition will have a wider portfolio of skills than conventional ones, and so will enable a smaller board.
Is the organisation operating in a highly regulated sector? The financial services sector ̶ banking, insurance, investment, real estate, consumer finance, mortgage lenders and so on ̶ is an example of a highly regulated sector. Mining and energy are others. From today’s viewpoint, it seems as though increased regulation is a likelihood across many sectors. Growing regulation is likely to mean that companies in such industries might need bigger boards in order to gain a wider diversity of skills and access a wider network.
Yes, the trend is towards smaller, more effective and increasingly professional boards, but this is not an inflexible rule; bigger boards could be necessary for certain organisations. We repeat: everything depends on what the organisation needs at a particular time.
Parmi Natesan and Dr Prieur du Plessis are respectively CEO and facilitator of the Institute of Directors (IoDSA); email: info@boardgovernance.co.za
