Board structure and styles

Editor's Notes

• #10: Introducing the Professional Board I propose a model of professional directorship that directly responds to the three main factors behind ineffective decision making. In this model, all boards would be limited in size to seven people. Management would be represented by the CEO, and the other six directors would be independent. Most of the independent directors would be required to have extensive expertise in the company’s lines of business, and they would spend at least two days a month on company business beyond the regular board meetings.Smaller size. Many of the financial institutions that failed in 2008 had very large boards, and all had a substantial majority of independent directors. Citigroup, for example, had 18 directors, of whom 16 were independent. Boards as large as this are common in the financial sector. Industrial companies tend to have somewhat smaller boards—the average size for S&P 500 companies was almost 11 in 2009, according to recruitment consultants Spencer Stuart.But even 11 directors are too many for effective decision making. In groups this large, members engage in what psychologists call “social loafing”: They cease to take personal responsibility for the group’s actions and rely on others to take the lead. Large groups also inhibit consensus building, which is the way boards typically operate: The more members there are, the harder it is to reach agreement, and so fewer decisive actions are taken.Research on group dynamics suggests that groups of six or seven are the most effective at decision making. They’re small enough for all members to take personal responsibility for the group’s actions, and they can usually reach a consensus in a reasonably short time. In my opinion, these advantages of small size outweigh the potential benefits of having extra generalists on a large corporate board.The case for professional boards, as set out in an article in Harvard Business Review by Robert Posen, is no surprise. The lack of attention paid by boards to the current economic crisis has been problematic. There have been two factors, both in the UK and US that contributed to this.•    The lack of knowledge of board directors about the organisations that they serve and the lack of time to get familiar with it.•    The dynamics of the board: courage, resilience and insight are required by board members to challenge the status quo and add real valueThe proposal for professional boards is therefore on the horizon. It would undoubtedly provide a far better level of professional input in assessing risk, nominating directors etc. However, this will not improve the boards’ dynamics. This is a leadership issue and that is where the role of the Chairman comes in.In research that we have conducted over the last 20 years on fraudulent boards we found that they are more likely when there is increased governance. The problem was that directors would not challenge the boards.There is therefore a case to split the roles of Chairman and CEO so that challenging the leadership is made realistic where necessary. Otherwise, professional auditors will simply be browbeaten to behave in certain ways by dominant characters. Professional boards would only solve part of the problem boards are currently facing.