Size Matters: Right Sizing Your Board of Directors

I recently attended a seminar by the president and CEO of BoardSource, Linda Crompton. As you might imagine, Linda lives and breathes boards of directors and talks all over the country about nonprofit board effectiveness. She said when she talks to people about boards, the most common question she gets is “How big should my board be?” Linda said she always responds to this question by saying, “It depends.” (Note 11) That’s a good answer, but just what are some of the things it depends on?

The first thing is human nature. After all, a board is nothing more than a group of human beings trying to work together to create the best results for the organization they are charged with directing and protecting. Human beings work best in groups of a certain size. Over the years a number of studies have been conducted on the effectiveness of group decision making. One such study by the authors of Decide and Deliver: 5 Steps to Breakthrough Performance in Your Organization determined that the optimum size for a decision-making group was seven people and that for each person added above this, the group’s decision making effectiveness was reduced by 10%. (Note 3) Another study found that the most effective number was five, but then noted that the effectiveness of the group decision making in groups between five and eight neither increases nor decreases. (Notes 7,8) Drawing from these studies, it would seem that the ideal board size as far as human decision making is somewhere between five and eight. But it’s not that simple.

Another factor in determining board size is the depth and complexity of the issues facing the corporation. In a recent panel discussion of board governance, William Hawfield, a founder of The Board Group – a consulting firm which has helped create more than 100 boards for both private and public corporations – recommended that for small to medium size corporations with relatively straightforward missions the board size should be no more than five people. (Note 12) Note that this corresponds to the number recommended in one of the two academic studies mentioned above.

But as corporations grow in size and complexity, it is likely that the board will also grow. This was the finding of a group of scholars in 2005. Specifically they noted that the complexities of the new regulatory environment created after the Sarbanes Oxley legislation in 2002 had a tendency to increase the size of boards. This same study indicated that corporations increasing the complexity of their operations by introducing new product lines or expanding into new territories had a tendency to increase the size of corporate boards. (Note 4) Also impacting the size of public corporation boards has been activist investors such as TIAA-CREF and CALPERS, both of which have shown an interest in increasing the percentage of independent outside directors on corporate boards.

So what size are the boards of the big, complex publicly held corporations? A study of 473 public companies between 1988 and 1999 indicated that most public companies have boards in the range of 8 to 11 members with the mean being 9.5 and the median being 9. (Note 7) More recently, a book by Cornelis de Kluyver, dean of the University of Oregon business school, stated, “Today the average Standard & Poor’s 500 board of directors has 11 directors.” This is slightly more than the 9 board members indicated in the pre-Sarbanes Oxley study, but substantially lower the than the average of 18 board members that de Kluyver indicates was the case 25 years ago. (Note 2) Clearly, despite the increasing complexity of the post Sarbanes Oxley corporate environment, for-profit corporation boards are tending to be relatively small, manageable groups which generally conform to the studies of effective group decision making cited earlier.

So far this all seems relatively straightforward but now comes the more difficult part. Specifically, what about the boards of nonprofit corporations? The data here are quite interesting compared to for-profits. BoardSource’s Nonprofit Governance Index for 2010 indicates that the overall average for the hundreds of nonprofits involved in their study was 16 members (Note 1) – almost 50% larger than the current size of the average large public corporate board and more than three times the size of the recommended board size for smaller private corporations. Why is this?

In the management literature, there is something known as the “law of nonprofit complexity.” This “law” was proposed back in 2000 by a scholar named H. K. Anheir. In essence, Anheir theorizes that the management of nonprofit corporations is more complex than the management of for-profit corporations of comparable size.

“As a result of this diverse list of constituents, stakeholders, obligations, and revenue sources, nonprofits have, in effect, multiple bottom lines. A recognition of nonprofits as uniquely complex suggests one problem with incorporating ready-made management models from the business world, where prices, wages, profits, and taxes drop down into a single bottom line. In sum, the for-profit model may be too unsophisticated to meet the needs of the non-profit organization.” (Note 9)

If we accept the law of nonprofit complexity and refer back to the tendency of corporations to increase their board size in the face of increasing complexity, it seems logical that there would be larger boards in nonprofits than in the for-profit world.

And yet we know from studies cited earlier that the effectiveness of the group decision making process decreases as the size of the group gets larger. Why then would non-profits deliberately choose to create more inefficient boards? I believe the answer lies in the nature of what nonprofit boards are asked to do.
First, nonprofit boards often assign themselves more responsibilities that do corporate boards. There are a couple of key reasons for this. The first is the nature of the business. Many nonprofit boards take on responsibilities like fundraising that are not board responsibilities in the for-profit world. Nonprofit boards also have a tendency to grow because of the diverse nature of the stakeholders in the organization. Indeed, many boards believe it is critical to give all stakeholder groups a voice in board deliberations.

These added responsibilities are compounded by the fact that many nonprofits have relatively small staffs to support them. While I am certainly not recommending that boards take up operational responsibilities, it is a fact of life in many nonprofits that there are limited resources to carry out the tasks needed to support the deliberations of the board. Whereas for-profit companies would likely either have the staff in house or sufficient resources to secure outside consulting help, the board of a nonprofit may not have this luxury, and some of the detailed work of the board will need to be carried out by board members themselves.

I should also note that nonprofits corporations are not all the same. They come in a variety of shapes and sizes. Some are huge organizations that look and act more like a for-profit corporation than a nonprofit, while others are small organizations that do not even have staffs to carry out the organization’s operational responsibilities. The nature of the organization will clearly have a significant impact on the size and shape of any particular nonprofit organization’s board.

It is also important to note that there are different types of non-profits under the law. The missions of these organizations can vary as can the composition of their boards. For example, while most of the nonprofits in the previously cited BoardSource survey were public charities, there are other forms of nonprofits like foundations whose missions and operations can vary significantly from those of public charities. A 2010 study of the Council on Foundations indicated that among all foundations, the average size board was 12. This is 25% below the size of the average board reported by BoardSource. And within the world of foundations, the size of the boards varied from a low of 7 for family foundations to a high of 16 for community foundations. . (Note 5) I believe this difference is directly related to the issues of complexity and constituencies served.

OK, you say, this is all very interesting but it does not answer the question we started with, “What size should my board be?” Here are a couple of suggestions that might help.

1. Build a board that is sufficiently large to carry out your board’s responsibilities, without unnecessarily degrading its effectiveness with excessive numbers that inhibit individual engagement and involvement for your board members.

2. If you want to take advantage of the benefits of deliberative group decision making, I recommend a minimum of 5 to 7 board members, particularly if your organization is a for-profit corporation. Seven is probably the right minimum number for nonprofits – at least that is what the Minnesota Council on Nonprofits recommends. (Note 13)

3. On the other end, I would limit the governing board to somewhere in the vicinity of 15 members. If you think you need more than 15 on your board for one reason or another, consider separating the governing functions from the representational and relationship functions by creating non-fiduciary groups such as advisory boards. Operating committees of non-board members may also be created to carry out specific functions under the policy guidance and oversight of the board. Such a group might address fundraising, for example.

4. Within the range of 5 – 15 members, the board should carefully examine its responsibilities to determine precise size. Factors to consider include

a. Functional requirements in terms of professional expertise to help with strategic priorities or to bring needed expertise to the board — for example, financial expertise to handle audit committee responsibilities.
b. Diversity requirements in terms of age, ethnicity, or gender. What is needed for the board to have the right variety of viewpoints and dialogue on critical issues?
c. Representational requirement in terms of the stakeholders in the organization. This might include geographical representation, beneficiary representation, governmental representation, community representation, etc. As with diversity, the question is what representation is needed to help the board fully understand the issues and options it is facing. This question is particularly critical for community nonprofits.

d. Regulatory requirements such as the need for independent outside directors or the need for certain types of expertise on certain functions like audit committee functions. (Note 10)

So what does all this mean? It means there is no outside expert that can arbitrarily tell a board up front what size it should be. The board itself needs to determine the right size. After considering all the points above, the board needs to sit down and carefully examine its own situation and determine an appropriate size. Then, before settling on a final number, the board should ask itself two final questions: (1) have we designed a board that can carry out all of our functions, including committee work, without overburdening the individual volunteer board members? And (2) have we designed a board that will allow all board members to stay personally involved and interested in the activities of the board. If the board can answer “yes” to both of these questions, you have probably arrived at the right number for your board!

Good luck in this endeavor.

Notes
1. BoardSource, Nonprofit Governance Index 2010. Published by BoardSource and available on their website www.boardsource.com, p 19.
2. De Kluyver, Cornelis A., A Primer on Corporate Governance. Business Expert Press, New York, 2009, p 58.
3. Harvard Business Review Stat Watch, Jan Feb 2011 which cites, Decide & Deliver: 5 Steps to Breakthrough Performance in your Organization by Marcia W. Blenko, Michael C. Mankins and Paul Rogers, Bain and Company, 2009. HBR article available at hbr.org/2010/01/stat-watch/ar/1.
4. Boone, Audra L., Laura Casares Field, Jonathon M. Karpoff, and Charu G. Raheja, “Determinants of Corporate Board Size and Composition: An Empirical Analysis.” Version 3-0-23, Oct 17, 2005 available at http:mbavanderbilt.ued/Vanderbilt/data/research/1305abstract. Final version published in the Journal of Financial Economics, Vol 85, Issue 1, Jul 2007, p 66-101.
5. Council on Foundations, “What is the Best Size for Your Board”, 2010. At http://www.cof.org/files/documents/governing_boards/board%20briefs/boardsize.pdf
6. Ning, Yixi, Wallace N. Davidson III, and Jifu Wang, “Does an Empirical Corporate Board Size Exist? An Empirical Analysis” Journal of Applied Finance, 20: 57-69. Also available at http://69.175.2.130/~finman/Publications/JAF/2010/Ning.pdf
7. Margolis, Sheila, “What is the Optimal Group Size for Decision Making?, www.shielamargolis.com/2011/01/24.
8. “How to Design Small Decision making Groups,” www.intuitor.com/statistics/SmallGroups.
9. Landsberg, Bill E., “The Nonprofit Paradox: For-Profit Business Models in the Third Sector,” The Journal of Not-for-Profit Law, Vol 6, Issue 2, January 2004. Available at http://www.icnl.org/knowledge/ijnl/vol6iss2/special_7.htm.
10. List was derived from a discussion of functional staffing approaches listed by Carter McNamara in “How Many Members Should We Have?” http://managementhelp.org/blogs/boards-of-directors/2010/04/04.
11. Stated at seminar on board governance sponsored by the Center for Nonprofit Management attended by the author on June 17, 2011.
12. Stated during a panel discussion at a seminar sponsored by the Association for Corporate Growth, ACG101 chapter, on June 1, 2011.
13. Minnesota Council of Nonprofits, “Board Composition and Structure”, available at www.minnesotanonprofits.org/nonprofit-resources/leadership-governance.

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