The Right Way to Think About Board Size, Term Limits and Executive Sessions
A highly functioning nom/gov committee drives board of director productivity and effectiveness when it gives thought to board size, term limits and executive sessions. According to one survey by a nationally-recognized corporate governance association, 90% of respondents think the optimal size for an effective board of directors is eleven or fewer board members.
Unless the business is particularly large, global or complicated, board sizes greater than seven begin to reach a diminishing return. By their nature, the larger the group the more challenging it is to manage, focus and schedule. Larger boards are also more expensive. Determining board size should be a function of required expertise and workload. Odd numbers are generally preferred, but if the board of directors is consistently needing the odd number to move and approve agenda items then bigger issues may underlie this behavior, and further nom/gov committee investigation is warranted.
The same survey was less definitive with respect to board of director term limits. Though age limits have been used in the past, they aren’t the preferred approach. More common is to ask board members to sit for election each year, but ask for at least a three-year commitment should they be successfully reelected each year. Provided the board member is engaging, providing value and willing and able to serve, longer tenure is valued since it takes time to learn a business and see it through its economic cycle. Annual turnover isn’t preferred. However, annual election does give the nom/gov committee greater degrees of freedom assessing the board of directors against business needs now and into the future, evaluating board member effectiveness and making appropriate recommendations more frequently, if needed. Annual board of director election keeps board members more accountable.
Executive sessions are an important oversight function of the board of directors and are essential for good corporate governance. The executive session occurs without the CEO present. Generally, if the CEO is also Chairman of the Board then a lead director may be named either officially or on an ad hoc basis to lead the executive session. Ideally, this should be discussed ahead of time and agreed so the lead director can be prepared to make observations during the meeting and check-in with other board members during the course of the day. This allows for the lead director to have a “loose” agenda during the board of directors executive session to keep it focused, productive and timely. An unscripted executive session can lead to unproductive outcomes. When board of director meetings include an overnight, care should be taken to cut off executive session should alcoholic beverages be part of the evening.
Well, I hope you enjoyed the Board of Directors section of our website and found a few takeaways that may improve your effectiveness as a Chairman of the Board because board chairs aren’t born, rather, they develop into the role through a lot of hard work. The best-in-class chairman of the board is self-educated and credentialed. They understand continuing education is germane to achieving and maintaining a highly functioning board of directors.
There are many resources available to assist with this effort, and one of the best is the Private Directors Association (PDA). I encourage any newly-minted chairman of the board or “seasoned” veteran to keep current with ongoing board of director education. Better yet, include corporate governance education on the regular board agenda by setting aside an hour, once or twice a year. For example, schedule a “board’s role in strategic planning” primer right before the annual strategic planning presentation. Timely, succinct board of director training like this is effective at getting board members focused and engaged, and usually leads to a much more productive working session following such an event.
If you found the BOD section of our website to be informative then I would like to hear your feedback. I primarily wrote it for newly minted board chairs knowing so little information is out there for them. I think more seasoned board members may also find it a useful refresher.
I initially wrote this as a single essay and later thought it might be more impactful if broken up into logical parts. In total, this section is longer than most necessitated by the fact the chairman of the board role is broadly defined, and the complexity of issues increasing. Areas I purposefully skimmed over and would like to address in future essays include the board’s role in strategic planning, enterprise risk management, cybersecurity and IT, employee engagement, leadership development, succession planning, executive compensation, sustainability, and community relations. Indeed, this is a long list, which only reinforces the importance of ongoing board member education and networking.
Mark Richards is the retired Chairman and CEO of Appvion, Inc. headquartered in Appleton, WI.