There is no correct answer to the frequently asked question as to the optimal Board size, simply because the answer depends on a varying number of factors. Striking a balance in the size of the Board highlights the direct relationship between the size and complexity of an organization and the size of its Board as well as functional requirements in terms of professional and technical expertise required to provide strategic direction. Other key issues for consideration include, diversity in terms of age, ethnicity, and gender; the age of the organization, its core objectives, activities and industry, funding requirements as well as the depth and complexity of the business.
Clearly, the Board should be large enough to provide the relevant skills and expertise it requires to function effectively, but of a “manageable” size to allow for quality interaction. However, a very large Board may become unwieldy – decision making becomes somewhat slow as reaching consensus would take longer to achieve. Oftentimes, factions develop on unduly large Boards and substantial influence may be exercised by a small caucus (aka “cabal” in the Nigerian parlance).
Larger Boards are also prone to “social loafing” – some directors may not fully participate in strategic discussions but rely on others to take the lead and are unable to take responsibility for the Board’s actions. Such Boards also tend to be contentious and fragmented, which reduces their ability to collectively discharge their primary responsibility of managing the affairs of the company.
Smaller Boards on the other hand may elicit more active participation from respective members, but may collectively lack the full complement of knowledge and experience necessary to perform all the Board’s oversight responsibilities.
In Nigeria, the Companies and Allied Matters Act (CAMA) provides that a company shall have at least 2 Directors. Companies are at liberty to determine the upper limit by their Articles of Association. The SEC Code of Corporate Governance recommends a minimum of 5 Directors (with no upper limit) while the CBN Code stipulates a maximum of 20 Directors. The NAICOM Code for Insurance Companies provides for a minimum of 7 and a maximum of 15.
The Code of Corporate Governance for Pension Operations contains a very interesting provision – viz “The Board shall not exceed the size that will allow it to employ simple effective methods of work to enable each Director to feel a personal responsibility and commitment. The Board shall take into cognizance, the scope and nature of operations of the company… .and shall comprise directors, who as a group, provide core competencies that are beneficial to the operations of the company”.
In compliance with the requirements of the various regulations and industry specific codes –including the appointment of Independent Directors; composition of Board Committees; and in certain cases industry specific experience and expertise – there is a tendency for companies to appoint more Directors. Furthermore, Boards expand beyond reasonable limits in a bid to accommodate several interest groups such as shareholders, investors, employees, family members and other stakeholders. Recently, there have been increased agitations by minority shareholders for representation on the Boards of public companies. The clamor for gender diversity on Boards has also added to the pressure on Board size.
A minimum of 5 Directors is recommended as a good size for start-ups as this allows the company to benefit from the experience, expertise and networks of these individual Directors, with enough flexibility to increase its size in the future. Decisions around accepting additional investment are easier to make when there is room on the Board to accommodate investor nominees on the Board.
The Board is of the right size if it is able carry out all its oversight functions, including effective use of relevant Board Committees with the requisite skills available on each Committee; Directors are able to stay personally involved and interested in the activities of the company; and the decision making process remains efficient. An ideal Board should be of a sufficient size relative to the scale and complexity of the company’s operations and composed in a manner that ensures appropriate diversity. Directors should be individuals of integrity, committed and able to devote time and effort, possessed of relevant competences, industry credibility, relevant networks and connections and committed to the enthronement of good corporate governance.