How Many Directors Does a Board Need?

Trying to get 12 people to agree on anything can be a tall order. Ask anyone who has ever served jury duty—or, of course, on a corporate board.

So maybe 12 directors, the size of many boards these days, is too many.  As business leaders, shareholders, and governance experts examine the role of corporate boards, they are increasingly asking what is the ideal number of directors to be agile enough to keep up with the accelerating pace of change. At the same time, they are grappling with the fact that the need for constant business transformation brought on by digital advances, the increasing importance of talent development, and pressure from shareholders for more environmental, social, and diversity initiatives means boards need to find directors with specialized skill sets.

Boards have shrunk as they have become more professionalized. “As organizations focus more on aligning the skills of directors with strategic business goals, the work of the board has been able to be taken over by marginally fewer individuals,” says Barton Edgerton, senior manager of governance analytics at the National Association of Corporate Directors.

However, there is no consensus on optimal board size, Edgerton says. Over the last few years, Russell 3000 and S&P 100 companies have averaged around nine and 12 directors, respectively. The average in Italy, Spain, and the United Kingdom is narrower, between 10 and 11 directors.

Boards could shrink even further, says Charles Elson, director of the University of Delaware’s Corporate Governance Center. “Between seven and 10 directors is where you want to be,” he says. That’s enough directors to staff major oversight committees without overtaxing them, according to Elson, yet small enough to have relationships among directors and between individual directors and the CEO. CEOs need to keep directors informed between meetings too, says Joe Griesedieck, vice chairman and managing director of Korn Ferry’s Board and CEO Services practice. 

There’s ample research that shows the smaller the board size the better the organization performs. In the early 1990s, David Yermack, finance department chair and professor of finance and business transformation at New York University’s Stern School of Business, found that organizations with smaller boards had higher stock prices and more financial growth than peers with larger boards. “There is a clear relation that the larger the board, the less the value of the company,” says Yermack, who analyzed companies that had as few as four directors and as many as 30. Much of the difference in performance is rooted in group dynamics. Smaller boards have a greater propensity to take fewer risks and seek the middle ground less, for instance, whereas larger boards tend to be more conservative and consensus-seeking, says Yermack.

Unlike Elson, however, Yermack doesn’t take a position on the optimal number of directors. “While smaller is better and at no point did the affect bottom out, some companies are more complicated than others. Multinational corporations will need more directors than a company in a single industry,” Yermack says, His research found that firms added 0.3 directors, on average every time they doubled in revenues. 

More directors mean more costs for the organization. Plus, in an era where investors, particularly activist ones, are demanding greater fiscal prudence and transparency, a large board could attract unwanted attention. Indeed, part of the reason board size has remained range bound in recent years is because most organizations are afraid to step out of the norm, says Elson.

One way boards have kept from expanding while getting the specialized counsel they need is by employing advisory boards more. In the past, advisory boards would be consulted if an organization were expanding into a new region or developing a new product. These days, however, they are being brought in to advise on environmental sustainability, new technologies, and even new business models. This approach gives boards the flexibility and agility they need while also limited those with actual governing and decision-making responsibilities.

While boards that have fewer than seven members might find it difficult to accomplish all the work a public company requires, Griesedieck says boards need to think more critically about whether they have enough directors or too many. “The pressure coming from investors to ensure that directors have the relevant skills to further the company’s strategy could shrink the board even further,” he says.