The Korn Ferry 2018 Ireland Board Index revealed that Irish boards are getting smaller – will this impact performance?
The fallout from the financial crash a decade ago has had a lasting impact on Ireland and its boardrooms. Korn Ferry’s Board Index found an average reduction in the number of board directors, from 9.5 in 2007 to 7.5 in 2017. Companies large and small were placed under the spotlight post-crash. Larger boards were increasingly viewed as unwieldy, prone to ‘group think’ and difficult to govern.
The establishment of the Irish Stock Exchange’s Corporate Governance Annex may also played a role. ISE firms were now expected to justify their board size and structure, which required greater consideration and assessment of the board.
Korn Ferry’s Board Index has also revealed that, while larger companies such as AIB and Kerry Group kept a larger number of directors, they had also experienced reduction in the board size (from 15 to 11 and 9 respectively). Clearly, ISEQ companies have moved to smaller boards.
This shift in size has had a number of notable implications for the board and its members.
Smaller boards, larger expectations
As board sizes have shrunk, the expectations placed upon board members has increased. No longer can members hide away from contributing to their boards or get away with a lack of preparation.
Directors are now expected to ensure they have ‘done their homework’, that they understand the strategy of the organisation(s) they represent and bring the right solutions to the table.
This focus on individual accountability has translated to greater scrutiny of executive issues and proposals, along with heightened activity within sub-committees. While overall board size has significantly reduced, the number of subsidiary and board committees have dramatically increased as a result of a growing number of multinationals setting up operations in Ireland. In 2007, the listed companies surveyed shared 95 board committees. This has risen 148 in 2017.
Audit committees normally cover risk management. However, the number of companies with a separate board risk committee has quadrupled, from just 2 in 2007, to 8 in 2017. Meanwhile, the average number of board committees per company has risen to 3.29 from 3.17 in 2007. In 2017, 1 in 3.5 companies surveyed for the Index also had on average a fourth committee.
Taking into account the reduction in the board director numbers, the rise in committees per organisation infers a greater level of involvement and responsibility on today’s non-executive directors.
Higher quality dynamics
As boards have become smaller, the quality of their dynamics has also improved. Previously, larger boards could prove difficult to chair and to control. With so many voices round the table, hiding a lack of preparedness was much easier.
With smaller boards, all members are now expected to make a significant contribution. This has improved communication within boards, leading to better productivity, and higher quality solutions for an organisation.
Such improvements have also diffused ‘group-think’, preventing its infiltration into board meetings and ineffective decision-making.
Better performing Boards
Better quality communication and dynamics within Irish boards have improved board performance, making them more effective overall for their organisations. Today’s directors must be actively engaged, demonstrating their understanding of the organisation and its culture. In sports, when an athlete does not perform well, they run the risk of being dropped from that team. The same ethos implies to the boardroom
Emer Gilvarry, NED at Greencoat Renewables Plc and contributor to the Index, remarked that it is crucial for board members to be out on the “shop floor”, ensuring that “they are familiar with more than the boardroom of an organisation”.
By ensuring that they are visible and active within an organisation, board members can better apply their knowledge, improving the performance of the board and the company as a whole.
As boards have shrunk in size, there has been a positive shift towards the strategic alignment and management of the board. Korn Ferry has increasingly assisted clients to place strategy at the forefront of the boardroom and its decision-making.
In light of the considerable technological, political and economic disruption facing organisations, balancing board size with the skills necessary to govern effectively has become something of an art.
By placing a strategic approach at the forefront of a board’s agenda, the most successful Chairs plan three to five years ahead, ensuring that significant skills gaps do not form.
Chairs who take time to network and develop relationships will have access to a larger pool of talent, who can take board positions and add value to an organisation. By developing depth charts, chairs can identify the skills needed to improve their board.
Skills gaps can also be bridged by up-skilling existing non-executives, helping keep board numbers low and contribution high.
Has Board downsizing improved Irish businesses?
Today’s boards are held more accountable, fostering quality contributions from independent and non-executive directors, and improving overall performance.
The heightened governance and professionalisation of the board, that has come with downsizing, promotes an environment where the executive team are effectively challenged but also supported by an engaged, diverse group of professionals. That equates to more considered decision making that benefits the organisation and its stakeholders.
Fundamentally, the reduction of board size has positively impacted Irish business. Paired with the increasing strategic-first approaches and effective planning of chairs, let’s hope that the rising performance of the Irish boardroom continues.