March 24, 2020 All Industries
Tucked into the surprise announcement that Chipotle Mexican Grill founder Steve Ells would step down as executive chairman of the board was news that the fast casual food chain would reduce the size of the board from 10 members to seven.
It’s a tricky task, determining the right size of a board. Too many members can lead to an overlap of responsibilities and create an atmosphere that’s difficult to move items forward or express ideas. Too few members risks not having enough bodies in the room to provide true oversight or a great-enough variety of skill sets.
It’s a balance that’s determined by the age, size and complexity of the company. Even so, there are some best practices to consider.
While average board sizes don’t change much from year to year, there are indications that a smaller board works better. Between 2011 and 2014, companies with a market capitalization of over $10 billion that had between eight and 10 board members outperformed peer groups by an average of 8.5 percentage points, according to research from The Wall Street Journal and governance experts GMI Ratings.
Companies with boards that had 12 to 15 members underperformed all other board sizes by 10.85 percentage points, on average. The GMI Ratings study, which included any company with a market capitalization of $10 billion or more, found that the average board size was about 11 directors.
At non-profit boards, the average was closer to 16 members. Since non-profits aren’t a worried about ensuring a monetary return, the boards take on more responsibilities to fund the organization, often requiring more seats around the table to accomplish everything.
But there can be diminishing returns when it comes to smaller boards. Financial services firm Morningstar found that small-cap companies lag larger firms in their rate of female representation among directors.
“Whatever pressures are driving female representation at the upper end of the market-cap range, they are much weaker at the lower end of the range,” wrote Morningstar.
That may be because one tactic companies have used to increase female representation among directors is by increasing the size of the board. Over half of all new female board members at companies listed on the S&P 500 took a seat that was newly created, according to a report by PwC, reported by Fortune. “We don’t want to be contained if we see great candidates who bring an element of diversity,” TripAdvisor’s Chief People Officer Beth Grous told Fortune, after the company added two women to its board, increasing the size from eight to 10 directors.
Since more diverse boards perform better on certain measures, like on environmental, social and governance improvements, growing your company’s board can also, potentially, boost shares.