By Lucy P. Marcus
The views expressed are her own.
Last week the UK’s Financial Services Authority (FSA) released a report on the near collapse of Royal Bank of Scotland (RBS), the overambitious institution that took over ABN Amro and then had to be bailed out by the British government to the tune of £45 billion ($70 billion) in 2008. It is one of several financial institutions around the world that have encountered serious difficulties in the past several years, but this report is particularly edifying.
The report has harsh words for the board of RBS, and highlights some of the failures of the RBS board in a way that provides an implicit warning for board members of financial institutions. The lessons that can be gleaned from looking at the RBS case are valuable for any director serving on the board of any business.
One of the issues that the FSA report highlights is that of a board’s size. In the case of RBS, the FSA Report points out that the sheer size of the 17 director RBS board reduced the board’s overall effectiveness. As the report notes, it was possible that the having such a large board “made it less manageable and more difficult for individual directors to contribute, hence reducing overall effectiveness.”
There clearly is such a thing as an effective size that ensures that there are enough voices with sufficient expertise around the table to allow for real interaction and deliberation. Academics and consultants will give all sorts of opinions as to what the ideal size is, but board members, and indeed board chairs, know without scholarly assistance when the board has become unmanageable and unwieldy. I’m partial to seven to nine members, depending on the size of the company. Much larger than that and you can be in danger of ending up with a two tier board, where some people can be more committed or involved, and others…not. It is equally important to have a board that is not too small—a critical mass of diverse expertise, background, and opinion is crucial to ensure substantive debate around issues affecting the organization’s performance and direction.
INDEPENDENCE OF THOUGHT AND ACTION
Such diversity is important to avoid another danger the FSA Report points out the RBS board suffered from: “group-think.” As the report notes, boards benefit from “some divergence from consensus.” In the case of RBS, it was noted that “rigorous testing, questioning and challenge that would be expected in an effective board process dealing with such a large and strategic proposition” as the ABN AMRO acquisition was.