Boards Shrink in Size to Optimize Decision Making

In today’s corporate governance landscape, issuers and investors alike are focused on the composition and evaluation of boards of directors. Boards are beholden to represent shareholders’ interests, and consequently, assessing and disclosing individual director contributions have become and important topic for shareholder engagement. Because a spotlight shines on boardroom diversity, many companies are reevaluating their board composition to ensure a rich trove of corporate experience to drive superior outcomes.

The number of sitting directors is one factor that may dictates a board’s overall performance. Boards must decide the optimal number of directors so that critical decisions are informed by an adequate mix of expertise. With too few directors, a critical mass of certain skills may be lacking. Conversely, too many directors may prevent efficient decision making.

According to the recent Equilar report, Board Composition and Recruiting Trends 2016, featuring commentary from Semler Brossy, the average board size of S&P 500 companies increased marginally over the last five years, ranging from 10.7 to 10.9 directors. Nonetheless, certain companies have vocally proposed reducing the size of their boards, believing that fewer directors make the board more efficient and representative of shareholder interests.

Among these companies, Walmart has taken action to reduce the size of its board, which in 2012 counted 16 directors. Over the past five years, Walmart reduced the size of its board from 16 to 12 directors, more in line with the S&P 500 average of about 11 directors.

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Walmart highlighted the move in its proxy (filed 04/20/2016, Page 3):

“We believe that Board refreshment and succession planning are critical as Walmart continues to change for our customer. We’ve added 5 new independent directors to the Board in the last 4 years, and we’ve made changes to the way the Board operates to maximize our effectiveness as we adapt to evolving customer needs. These changes include reducing the size of the Board while maintaining its independence, changing the composition of Board committees, and ensuring that Board and committee agendas are focused on Walmart’s strategic priorities.”

As scrutiny of boardroom diversity, in all its forms, continues to grow, other companies may follow in Walmart’s footsteps to ensure that their boards represent a wide spectrum of skills, experience and mindset while streamlining efficiency to fulfill fiduciary duties.

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For more information on Equilar’s research and data analysis, please contact Dan Marcec, Director of Content & Communications at dmarcec@equilar.com. Hannah Dumas, research analyst, contributed to this post.

 

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