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NZ Herald: Board size affects effectiveness

NZ Herald: Board size affects effectiveness

Given the recent scrutiny applied to Fonterra’s board size, Staples Rodway Director Tracy Hickman considers the optimal board – in theory and in practice.

In theory
The size of a board affects its efficiency and its effectiveness:

• It’s hard for everyone to participate fully in a very large board. Some board members may miss out on the opportunity to contribute, yet those less dominant members may possess skills and knowledge that are important to a decision.

• If greater participation by all board members is facilitated, it follows that decisions usually take longer in a larger board.

• However, a small board may have limited access to a range of knowledge and a lack of diversity of members.

The optimal size of a board depends on several factors, and is likely to change over the lifetime of an organisation. For start-ups a small advisory board may be sufficient, whereas a listed company will usually require a greater set of skills. Many small not-for-profit organisations have very large boards, with volunteer board members responsible for operational tasks as well as decision making.

Ideally a board will have enough members to allow:

• an in-depth understanding of matters that are regularly addressed, particularly for complex areas;

• important functional requirements of the organisation to be represented, using professional advisors as appropriate;

• adequate stakeholder representation;

• diversity in terms of board member backgrounds; and

• an understanding of regulatory requirements.

Importantly, there needs to be a balance to suit the circumstances.

What happens in practice?

A NZ Herald survey conducted in July 2015 of the 16 largest NZX companies found that all had boards with six to nine members, for example:

• Air New Zealand has six directors, all independent non-executive, with experience in tourism, finance, customer service and engineering.

• Fletcher Building has eight directors, mostly independent, reflecting industry experience in addition to financial, technology and general business skills.

• Ryman Healthcare has eight directors, including legal, medical, financial and professional governance skills.

The NZX itself has six directors, all non-executive, including three chartered accountants, and members with finance and engineering backgrounds.

In contrast, the Fonterra co-operative has 13 directors, reflecting extensive stakeholder representation with the vast majority of the board having active farming interests, together with other directorships. Acknowledging the spotlight on its large board, the number of Fonterra directors is under review. However, Fonterra is New Zealand’s largest company and the world’s largest dairy exporter; as such the complexity of its business may require a board on the larger end of the spectrum.

What do the experts say?

Academic studies show the optimal size to be five to eight board members; the Institute of Directors recommends six to eight board members. The Financial Markets Authority (FMA) Principles and Guidelines for Corporate Governance in New Zealand states that “to ensure an effective board, there should be a balance of independence, skills, knowledge, experience and perspectives”. Rather than providing a guideline on board size, FMA suggests that “the size of the board should be appropriate to meet the needs of the entity”.

In summary, reflecting on New Zealand’s successful businesses, commercial organisations should have somewhere in the region of six to nine board members, with a mix of executive, non-executive and independent directors. The key is to ensure the correct balance of board member attributes to enable best-practice governance to be implemented.

For further information on the topic, read the Institute of Directors The Four Pillars of Governance Best Practice or the FMA Principles and Guidelines for Corporate Governance in New Zealand.

About Tracy Hickman:

Tracy joined Staples Rodway in 2007, bringing over 20 years’ experience in industry, gained at a variety of companies from multi-nationals to small and medium enterprises, in Europe and New Zealand.

About Staples Rodway:

Staples Rodway is one of New Zealand’s largest Chartered Accounting networks with 420 staff. Celebrating its 70th anniversary in 2015, Staples Rodway provides audit, tax, business advisory and specialist services to a wide range of organisations, from SMEs to large corporate entities.

Given the recent scrutiny applied to Fonterra’s board size, Staples Rodway Director Tracy Hickman considers the optimal board – in theory and in practice.

In theory
The size of a board affects its efficiency and its effectiveness:

• It’s hard for everyone to participate fully in a very large board. Some board members may miss out on the opportunity to contribute, yet those less dominant members may possess skills and knowledge that are important to a decision.

• If greater participation by all board members is facilitated, it follows that decisions usually take longer in a larger board.

• However, a small board may have limited access to a range of knowledge and a lack of diversity of members.

The optimal size of a board depends on several factors, and is likely to change over the lifetime of an organisation. For start-ups a small advisory board may be sufficient, whereas a listed company will usually require a greater set of skills. Many small not-for-profit organisations have very large boards, with volunteer board members responsible for operational tasks as well as decision making.

• important functional requirements of the organisation to be represented, using professional advisors as appropriate;

• adequate stakeholder representation;

• diversity in terms of board member backgrounds; and

• an understanding of regulatory requirements.

Importantly, there needs to be a balance to suit the circumstances.

What happens in practice?

A NZ Herald survey conducted in July 2015 of the 16 largest NZX companies found that all had boards with six to nine members, for example:

• Air New Zealand has six directors, all independent non-executive, with experience in tourism, finance, customer service and engineering.

• Fletcher Building has eight directors, mostly independent, reflecting industry experience in addition to financial, technology and general business skills.

• Ryman Healthcare has eight directors, including legal, medical, financial and professional governance skills.

The NZX itself has six directors, all non-executive, including three chartered accountants, and members with finance and engineering backgrounds.

In contrast, the Fonterra co-operative has 13 directors, reflecting extensive stakeholder representation with the vast majority of the board having active farming interests, together with other directorships. Acknowledging the spotlight on its large board, the number of Fonterra directors is under review. However, Fonterra is New Zealand’s largest company and the world’s largest dairy exporter; as such the complexity of its business may require a board on the larger end of the spectrum.

What do the experts say?

Academic studies show the optimal size to be five to eight board members; the Institute of Directors recommends six to eight board members. The Financial Markets Authority (FMA) Principles and Guidelines for Corporate Governance in New Zealand states that “to ensure an effective board, there should be a balance of independence, skills, knowledge, experience and perspectives”. Rather than providing a guideline on board size, FMA suggests that “the size of the board should be appropriate to meet the needs of the entity”.

In summary, reflecting on New Zealand’s successful businesses, commercial organisations should have somewhere in the region of six to nine board members, with a mix of executive, non-executive and independent directors. The key is to ensure the correct balance of board member attributes to enable best-practice governance to be implemented.

For further information on the topic, read the Institute of Directors The Four Pillars of Governance Best Practice or the FMA Principles and Guidelines for Corporate Governance in New Zealand.

About Tracy Hickman:

Tracy joined Staples Rodway in 2007, bringing over 20 years’ experience in industry, gained at a variety of companies from multi-nationals to small and medium enterprises, in Europe and New Zealand.

About Staples Rodway:

Staples Rodway is one of New Zealand’s largest Chartered Accounting networks with 420 staff. Celebrating its 70th anniversary in 2015, Staples Rodway provides audit, tax, business advisory and specialist services to a wide range of organisations, from SMEs to large corporate entities.

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