Corporate boards of directors play a critical role in shaping corporate strategic direction and providing guidance and counsel to the CEO and the senior management team. At the same time, they must be looking over management's shoulder to fulfill their monitoring duties.

It's no secret that some boards are effective while others are not. As a result, governance experts have called for changes in how boards are comprised and operate, with some suggesting radical overhaul while others seek modification at the margins.

In a recent article in The Corporate Board, Robert Pozen, a well-respected senior lecturer at Harvard Business School and senior fellow at the Brookings Institution, outlined what he puts forth as a “new model” for board enhancement. Here we take a look at these recommendations and analyze them to consider whether they're likely to have the desired effect.

Smaller Size Board

Assertion 1: Boards should consist of only seven individuals, the CEO and six independent directors.

We know that board size has come down over the years, from the days when banks and other financial services companies had boards comprised of more than 20 members. Today, S&P 500 companies average about eleven directors. Pozen asserts that this number is still too large, resulting in difficulty in consensus building and in “social loafing,” where some directors expect others to take the lead in decision making.

How would board committee composition work? He says three of the six independent directors would serve as chair of the three major committees—audit, compensation, and nominating—with the other three independent directors each serving on two of these committees.

The idea of a smaller group to more easily reach consensus is appealing on one level, but not on another. Today's businesses are multifaceted and complex, requiring expertise in the  diverse business lines in which many companies operate, as well as in such varied disciplines as strategy, technology, marketing, globalization, regulation, and others. Boards now typically use a matrix to assess current and potential directors' expertise against needed skill sets, and experience shows that it is difficult if not impossible to find the desired combination of industry, discipline, and personal attributes in a relatively few independent directors. Indeed, finding the needed mix in eleven board members can be challenging.

Also, many boards have and need more than three committees, meaning only six independent directors properly carrying out their responsibilities would find it difficult to handle the workload.

Conclusion: Although a seven-person board would be more nimble and might work for some companies, it is unlikely to benefit many if not most S&P 500 companies. The reality is that expertise across multiple disciplines is absolutely critical to deal with the complex issues companies and their boards face, and it is unlikely that boards of larger organizations are going to be able to get there with only six independent directors. Further, while reaching quick consensus might be a desirable goal, so too is having sufficient depth and breadth of debate on critical issues among a group with sufficient skill sets, backgrounds, and expertise to arrive at the right decisions.

Greater ExpertiseAssertion 2: “Four [of the six] independent directors should be experts in the company's main line of business.”  

Bemoaning the backgrounds of directors of financial services companies that crashed in the financial meltdown, Pozen proposes that instead of academics or officials from industries far removed from the company's business, four of the directors should have expertise in the organization's “main line of business.”

The other two should be a generalist to provide a strategic perspective and an accounting expert to head the audit committee. But Pozen shares the views about complexity discussed above, saying “Most large corporations are extremely complicated entities. A typical corporation controls multiple subsidiaries engaging in a wide variety of functions [often operating] in far-flung foreign countries.” He also correctly notes that in many companies specific operational and technical knowledge is needed at the board level.

To me, these two sets of statements are at odds with one another and serve to support the above analysis that six independent directors often will not provide the desired mix of skills.  

Conclusion: Yes, significant expertise in the company's main line of business certainly is needed among board members—but it is difficult to see how the suggested board composition would provide the needed knowledge and experience across related industries and disciplines.

Increased Time Commitment

Assertion 3: Directors should spend more time on board business.

Pozen estimates that the Citigroup directors, for example, spent perhaps 200 hours annually on board business, consisting of seven one-day board meetings, several telephone meetings, and probably a few hours reading materials to prepare for each of the in-person and phone meetings. He suggests that this time commitment is not sufficient, certainly not in the case of Citicorp.

Under his proposed approach, directors would invest one or two days per month between regular board meetings, including visiting company locations from time to time to gain first-hand information. He also says that “independent directors may be concerned that, by spending more time on company business, they will increase their legal liability if things go wrong,” and then points out that such additional time would likely reduce legal exposure.

I've long advised my board clients that having age or term limits is an easy out, but can take valuable directors out of their board seats while letting under-performers take up valuable space at the table.

Based on data I've seen as well as my own experience, the suggestion to spend more time on company business has merit, even if it is not a new observation. Many of the directors I know have increased their commitments in recent years to spend the kind of time Pozen calls for. Spending 250 hours or sometimes significantly more a year is common, including visits to company locations and time spent obtaining information from a variety of independent sources.

Director concerns that spending more time on company business might raise legal liability are, to me, a non-issue. It is well established and well known among the director community that having sufficient knowledge of issues facing the company is critical to satisfying their duty of care.

Conclusion: Yes, spending sufficient time on company business is essential, and directors of some companies probably do need to put in more hours between meetings to have a sufficiently informed basis on which to add value in discussions and decision making. In recent years the directors of many companies indeed have been spending more time on board business, and the amount of time needed to effectively carry out responsibilities is best determined on a board-by-board basis.

Recruit Retired Executives

Assertion 4: In order to find qualified directors who have sufficient time, boards should look to retired executives and do away with a mandatory retirement age.

The idea behind this approach centers on recruiting individuals with industry expertise with sufficient time to spend on board business. Pozen notes that executives often retire at age 60 in good health and wish to make further contributions. To make this happen, he adds that boards would need to eliminate policies requiring mandatory retirement at age 70 or 72.

The writer makes good points in this regard, supporting my experience that some directors well into their 70s make very valuable contributions to their boards while some younger individuals don't. He also notes that it is better to perform periodic evaluations of the board as a whole and of individual directors, rather than resorting to age limits. I've long advised my board clients that having age or term limits is an easy out, but can take valuable directors out of their board seats while letting under-performers take up valuable space at the table. But there are different evaluation methodologies, and doing evaluations effectively is absolutely critical to having the right board composition.

Conclusion: Yes, recruiting directors who have the needed skills, capabilities, and time is necessary, and retired executives are a source worth investigating. And substituting an effective evaluation process for mandatory age (or term) limits not only enhances the performance of individual directors, but also can provide positive results in board composition.