Impact of Board Size on Corporate Governance and Supervision

Corporate governance the processes, policies, and practices by which a company is directed and controlled is a critical component of ensuring ethical and efficient business operations. One aspect that frequently comes under scrutiny is the size of the board of directors. Does a larger board mean better supervision and corporate governance, or is it a balancing act?

The answer, as one might expect, is not a simple 'yes' or 'no.' The effectiveness of a board is influenced by various factors, including size, composition, and the dynamics among its members. Too large a board may hinder decision-making and lead to less accountability. Conversely, a small board risks being dominated by a single individual, taking away the balance needed for effective governance.

The Optimal Board Size

Balance is key. A well-functioning board is one with members who bring different skills, perspectives, and experiences to the table. Here are some critical expectations of an effective board member:

New and Enthusiastic: Fresh perspectives and energy can be valuable, especially for long-standing companies that may become complacent over time. Experienced: Long-serving directors who understand the company’s history and industry can offer unique insights and continuity. Expertise: Directors with specific industry knowledge help ensure informed decision-making and lead to more effective oversight, as seen in the banking example mentioned. Team Players: Members who can work collaboratively to arrive at well-thought-out decisions are crucial. Independently Minded: Directors who can push back on groupthink and insist on fairness are vital for ethical direction.

The question of how large a board should be typically comes down to balancing these qualities against the need for efficiency and accountability.

Empirical Evidence and Corporate Success

There is some empirical evidence suggesting that after a point, larger boards tend to be less effective and less profitable over the long term. Studies across various industries have shown that smaller boards often outperform their larger counterparts. This may be due to fewer conflicts, more efficient meetings, and clear accountability.

Factors Influencing Board Size

One interesting factor affecting board size is the result of mergers. In such cases, both sides may need to retain board seats, leading to an enlarged board. However, it's important to note that a larger board does not inherently mean better supervision or governance.

Rotating board members every few years through a clear succession plan helps maintain a good mix of experience and new ideas. This ensures that the board can effectively monitor and guide management without becoming cumbersome or dominated by a single member.

Conclusion

To achieve effective corporate governance, the board needs the authority to oversee the management and enforce ethical standards. A well-constructed board, whether large or small, focused on the right qualities, will often lead to better outcomes than a poorly composed board.

Ultimately, the size of the board should be a balance of practical needs and the greater good of the company and its stakeholders. A smaller, well-commissioned board is more likely to yield better returns in the long term and provide the necessary supervision for optimal business operations.

Keywords: board size, corporate governance, board effectiveness