Board Structure

Introductory Note
Although it is common for board restructuring to be viewed as a mechanism for increasing governance effectiveness, neither data nor anecdotal evidence supports any significant correlation between the two. Structural changes to a board are essential at different stages of an organization’s development and may contribute to improved governance at a particular point in time. However, changing a board’s structure by itself does not lead to sustained governance effectiveness. Improved effectiveness is much more likely to occur when board structure is considered in the context of other governance mechanisms.

Definition
Board structure is one of three major governance mechanisms of a corporation. Charter provisions and state of incorporation laws are the other two.1 The main components of board structure are board size, board independence (the proportion of outside to inside directors), board composition, board committees, and the separation or integration of the CEO and Chairman of the Board (COB) roles.

Current Context

• The 2004 Corporate Governance Survey conducted by the Business Roundtable revealed that within the past two years, approximately 85% of companies surveyed have adopted new standards of board independence and 71% of companies have an independent chairman, a lead director, or presiding director.

• “It is a favorite topic of my academic colleagues to look at board size and downstream performance. There is a well-known curvilinear relationship. When boards are 15-plus or five minus, everything else taken into account, the company does not do quite as well. That is why companies are intuitively recognizing boards ought to be somewhere in the midrange.” 

Michael Useem Director of the Center for Leadership and Change Management
Wharton School, University of Pennsylvania

• Discussion about the separation of CEO and COB functions is more prevalent than ever. While separation of the roles has considerable merit, the shift to a split CEO-COB model will encounter significant resistance much of which will come from CEO’s who view splitting the role as diminishing their own.

• While there are increasing constraints and regulations concerning board structure, there is also a wealth of research demonstrating positive and negative effects of certain structures.  (For example, firms with an independent board, a board that elects directors annually, an audit committee ratified annually and comprised solely of outsiders, have higher value.2) This raises the question of whether specific regulatory guidelines with which all corporate firms must comply are beneficial to all boards.

Recommendations 

• Include a risk assessment function on your board, either as a separate committee or integrated as a function on an existing committee, such as strategy or audit.

• Compliance regarding board structure will not solve all issues.  Take advantage of current research and opinion when considering how best to structure your board.  Some suggested sources are listed below.

• Conduct a peer-group benchmark study comparing board structures and firm performance

Footnotes

More on Board Structure

Research

The Determinants of Board Structure, James S. Linck, Jeffry M. Netter Terry College of Business, University of Georgia ,and Tina Yang College of Business and Behavior Science, Clemson University, February 2007

Opinion

Splitting chairs: Should CEOs give up the chairman’s role? Robert F. Felton, The McKinsey Quarterly 13 March 2007      http://www.mckinseyquarterly.com/article_abstract.aspx?ar=1511