Walking the tightrope of board composition and finding the magic number

Composition goes to the heart of a board’s performance. Its members, 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 its execution. Still, 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; certainly not in this case.

As always, the King IV Report on Corporate Governance offers good guidance, even though it does not address directly the question of board size. 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 so as to maximise their contribution to the organisation’s sustainability. That said, there has been much research into a “magic figure”, which seems to conclude that ideal board size depends on the size of the organisation. For large, listed companies, eight to 12 directors is typical, while for medium-sized companies the number is six to eight. Smaller listed companies vary between four to six directors. Slightly different ranges apply to NGOs and unlisted companies.

Overall there’s a trend towards smaller boards, which are more active and collaborative and make decisions more quickly. Research seems to indicate that companies with smaller boards have better returns than those with larger ones. Yet there are a number of issues an organisation needs to consider when deciding how many people it needs on its board.

The fundamental is: what skills does the organisation need? Perhaps the best advice is to undertake a study of the precise skills it needs, given the sector and strategy. This process should not be skimped on. Board assessments should be used to gain an objective view of its performance.

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 the majority of the board members should be non-executive, and that most of them should be independent. Research by Korn Ferry, an executive search firm, indicates that eight of 10 directors 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 individual members.

Are the directors professionals? Given the huge demands placed on directors, a big trend has been to professionalise directorship. The Institute of Directors SA has led the charge and now offers two professional designations, certified director and chartered director. Professionalisation means directors can acquire the skills they need to fulfil their expanding roles methodically. By definition, professional directors 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 increased regulation is a likelihood across many sectors. Growing regulation is likely to mean companies in such industries might need bigger boards to gain a wider diversity of skills and access a wider network. 

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. Everything depends on what the organisation needs at the time. 

• Natesan is CEO, and Dr du Plessis facilitator, at the Institute of Directors SA.