These days, more than ever, boards of directors carry the responsibility for the company’s health, fiscal responsibility, and future expansion. This is particularly true for public companies. Over the years, I’ve worked with boards of both for-profit and nonprofit organizations. While some boards work better than others, there are key factors to consider to guide and support the board’s success.
Specialist vs. generalist
Many advisors recommend a board with people with specific areas of expertise, but I couldn’t disagree more. I believe board members should have very broad experience in various types of businesses that are similar to the ones on the boards of which they sit whether in the way they operate, their vertical, or their geographies. When specialists are needed, smaller companies can allocate them to their board of advisors, and larger companies should have the means to hire consultants or outside service providers for their specific needs. If the board members have enough experience, they’ll know just where to find help when they need it.
While size does matter, there’s no universal agreement on the optimal size for the board of directors. According to BoardSource, the average board size is 15, and according to the Corporate Library’s Study, the average board size is just under 10 members (clearly, these two studies were not using the same research base, but I digress…). For smaller companies, any governing body larger than 5-7 members becomes ineffective. Larger/public companies typically have larger boards, however, there are many committees for the board members to participate in (in particular an audit committee and a compensation committee, which are becoming more and more important in the governance of companies), so larger boards for larger companies become necessary. Any board larger than 15 members becomes difficult to manage and typically ineffective. As an example, IBM’s corporategovernance guidelines indicate that “10-14 directors on the board is optimal”. I happen to agree.
Independence from the company
The board of directors is a body of elected or appointed members who jointly oversee the activities of the company, including the CEO. Stacking the board with insiders inherently creates conflicts in oversight of the company and its CEO. Having majority or all outsiders on the board will help the board objectively guide the company in the right direction. An outsider is someone who has never worked at the company, is not related to any of the key employees, and has never worked for a major supplier, customer or service provider.
Many companies don’t call out a particular time-frame for their board’s tenure, however, with the fast changing nature of business, it is best they refresh their talent in the boardroom regularly. While there are benefits to continuity in the boardroom, becoming stale and complacent towards the company’s interests can pose risks to the company’s health and growth. Many boards hold reelections every year. I think having a maximum tenure of 7-10 years will help keep the board’s perspective fresh and objective. This also keeps away career board members who may lose their once-honed operational expertise by supporting themselves solely by sitting on corporate boards (I’d like to have that lifestyle, wouldn’t that be nice!).
Yes they do. Quite nicely, as it turns out. Board compensation can vary greatly based on the company size, location, and industry. Also, the composition of the compensation can vary widely from mostly cash to mostly stocks. According to a study by C-Suite Insights, the level of board compensation increases with the company’s market cap. On average, small-cap board members received $101,750 per annum, their mid-cap peers earned $138,500, and large-cap board members made $190,000. These figures include cash retainer fees, annual equity awards, and total meeting fees paid for service on the board. They exclude any fees paid for committee service. Keep in mind these are averages for public companies. Private companies do not publish their board’s compensation, so it can vary widely. Some Fortune 100 companies are known to pay 7 figures to their board members.
I recently wrapped up a strategy engagement with a long term client, and the board’s composition was the topic of many discussions. Clearly, it’s difficult for the board to self-regulate, and unfortunately, many boards wait for an external event (usually a negative one) to self examine. The best way to ensure a strong and objective board is to regularly examine the board’s composition, and update the bylaws as needed.