Does size matter?

by Cydney Posner

According to a study of boards of directors conducted for the WSJ, size does matter, and major corporations with smaller boards of directors tend to outperform their peers with larger boards.  (The study is discussed in the article entitled “Smaller Boards Get Bigger Returns” by Joann S. Lublin, dated August 26, 2014, in the Wall Street Journal.)

Why this result?  Some of the possible reasons cited are that smaller boards at large companies may foster more in-depth debates and greater candor, allow more nimble decision-making, provide more effective oversight of management (for example, being more likely to dismiss CEOs for poor performance), and may be more decisive, flexible, efficient, cohesive and hands-on, and less caught up in formalities. Commentators noted that, with big boards, the company often has “’people saying the same thing….It’s just not as efficient as a smaller board.’”  A large board can be “’too big to encourage the kinds of discussions you want’ because drilling down on different issues simply takes too long.…’A number of people feel constrained asking a second or third question.’”  However, some contend that large boards may be beneficial in some circumstances, if properly handled. For example, In heavily regulated industries, they may “allow you to engineer more diverse thinking.” The board may also be able to devise ways “to minimize potential drawbacks,” for example, by delegating heavy loads to board committees.

The study analyzed boards of companies with market caps of at least $10 billion across ten industry sectors over a three-year period between the spring of 2011 and 2014. The study showed that “typically those with the smallest boards produced substantially better shareholder returns… when compared with companies with the biggest boards….” In the tech sector, companies with smaller boards (eight to ten directors) had a total shareholder return that was 8.3% higher than the overall sector, while companies with larger boards (12 to 14 directors) underperformed the overall sector by 16.8%.  Similarly, health care companies with smaller boards outperformed the overall sector by 6.5%, while companies with larger boards underperformed the overall sector by 17%. Overall, companies “with small boards outperformed their peers by 8.5 percentage points, while those with large boards underperformed peers by 10.85 percentage points. The smallest board averaged 9.5 members, compared with 14 for the biggest. The average size was 11.2 directors for all companies studied….”

The article reports that many companies are taking steps to reduce the sizes of their boards to improve effectiveness, although downsizing may take years to achieve from a practical standpoint.

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