September 8, 2014

Smaller Boards: Bigger Returns

According to this WSJ article, a recent study by GMI Ratings found that – among companies with a market cap of at least $10 billion, those with smaller boards produced substantially better shareholder returns over a 3-year period than companies with the largest boards. According to the reporter, the study isn’t being made publicly available, so it’s difficult to draw conclusions outside the confines of what’s presented there.

However, as noted in a LinkedIn discussion on this topic, other research (for example, see “Higher Market Valuation of Companies with a Small Board of Directors” and “Larger Board Size and Decreasing Firm Value in Small Firms”) has previously identified an association between smaller boards and higher market valuation for companies of all sizes. And those of us who have worked with various boards ranging in size from 7 to 13 or more members can personally speak to the many attributes associated with smaller boards compared to larger ones.

But there are some downsides to smaller boards as well. Here’s an excerpt addressing some of the upsides and downsides of smaller and larger boards from our Board Size checklist posted in our “Board Composition” Practice Area on

Smaller Board

  • More opportunities for all directors to actively participate and be engaged in board deliberations
  • Greater flexibility and ease in scheduling meetings, setting agendas, distributing materials, communicating on impromptu basis
  • Individual directors more likely to assume responsibility rather than deferring to others – more likely to be a greater sense of ownership & accountability than with a larger board
  • More likely to accommodate detailed materials & discussions
  • Easier and less costly for company personnel to manage, coordinate, facilitate
  • Directors know each other better, increasing likelihood of cohesive board with feeling of common purpose and more productive working relationships
  • Greater workload burden on individual directors may diminish effectiveness – time commitment required may exceed time available on a per person basis
  • May have difficulty effectively staffing committees – particularly with continued additional regulatory-imposed responsibilities that increase committee work load & time commitment
  • More likely lacks diversity of experiences and perspectives characteristic of larger boards
  • Easier to reach consensus
  • Meetings tend to be much more informal


Larger Board

  • Can inhibit effective and equal opportunities for participation by individual directors
  • Larger boards tend to exhibit less questioning than smaller boards
  • Can interfere with effective functioning by limiting opportunities for meetings (due to conflicting schedules), necessitating formal procedures for communications, impeding collective input, discussion and consensus, etc.
  • Can more easily accommodate multiple committees effectively staffed
  • Conducive to more board work being delegated to committees (thus enabling active participation by individual directors that may be absent at the board level) – as opposed to remaining at full board level
  • Workload can be better allocated among larger number of directors regardless of committee structure
  • Can accommodate greater diversity in a traditional – as well as a broader – sense, thus allowing for broader range of viewpoints and ideas, which can lead to more thorough and thoughtful consideration of matters
  • More likely that few members will consistently dominate discussion while more reserved members fade into the background (consensus more likely achieved via a herd mentality)
  • At least some individual directors more likely to defer to others – not assume responsibility, accountability
  • Meetings tend to be much more formal out of necessity

Importantly, as noted in the LinkedIn discussion, even if there is an association between board size and shareholder returns, clearly board size is but one of many factors relevant to company performance – so this new study (and any other study) should be viewed in that context.

Study: Academic Directors Yield Better Corporate Governance & Company Performance

This interesting academic paper, “Professors in the Boardroom and Their Impact on Corporate Governance and Firm Performance,” describes the results of a study about the impact of having academic directors on the board. According to the paper, about 40% of the S&P 1,500 had at least one professor on their boards during 1998 – 2011, and for companies with academics on their boards, over 14% of their outside directors are academics. The findings certainly should make boards take a closer look at the academic director candidate pool as one of many great sources for quality candidates.

Noteworthy findings include:

– Companies more likely to have academic directors:

  • Larger companies
  • More research-intensive companies
  • Those situated more closely geographically to universities
  • Larger boards
  • More independent boards
  • Boards with more female directors
  • Boards with older directors
  • Companies where CEO has greater equity stake
  • High-tech and financial companies


– Presence and percentage of academic directors on the board positively impacts company performance

  • As measured by Tobin’s Q (market value/book value)
  • As measured by ROA (net income before extraordinary items & discontinued operations/book value of assets)


– Academic directors score higher than other outside directors on certain governance indicators:

  • They are more likely to attend board meetings
  • They hold more committee memberships
  • They are more likely to sit on monitoring-related committees (e.g., auditing, corporate governance)


– Academic directors strengthen the board’s oversight of management

  • They are associated with significantly lower cash-based CEO compensation, but not equity-based compensation
  • They are associated with a closer relationship between CEO forced turnover and company performance


– Academic directors strengthen the board’s advising & monitoring roles

  • Companies are less likely to manage earnings through discretionary accruals
  • Companies are less likely to be the subject of SEC investigations
  • Company stock prices reflect more company-specific information
  • Presence of academic directors is significantly and positively associated with acquisition performance
  • Companies are more innovative as reflected by the number of patents & patent citations

More on “The Mentor Blog”

We continue to post new items daily on our blog – “The Mentor Blog” – for members. Members can sign up to get that blog pushed out to them via email whenever there is a new entry by simply inputting their email address on the left side of that blog. Here are some of the latest entries:

– PSLRA: Ineffective Motions to Dismiss
– Top Ten List of D&O Coverage Questions for Directors
– Bylaws Mandatory Arbitration Clauses Gaining Ground
– Survey: Board Tenure & Governance
– Weighing Pros & Cons of a Dual-Class Share Structure

– by Randi Val Morrison