Stephen Mayne noted yesterday
that “Gunns already has the equal smallest
board in the ASX 200 with Chris Corrigan’s Patrick Corporation. How can the
smallest major company board declare there is no vacancy? What sort of a closed
shop are they running?”

While Mayne may have a legitimate point with
respect of the inability for an outsider to ever be elected to a public company
board (and many of the following points would not apply to an outsider such as
Mayne) one would question however whether a large boards of directors is
actually better for shareholders than the Gunns “closed shop” of 5 directors.

As an initial point, it could be
doubted whether any additional benefit is reaped by shareholders in exchange for
the additional expense of having ten to fifteen directors, rather than 4 or 5. While
there is no doubt that virtually all public company directors are in their own
right, extremely intelligent and able people, when on the board of public
company they are very much restricted in what they are able to do.

As noted by Warren Buffet in
his letter to Berkshire Hathaway shareholders in 2002, the nature of public
company boards, and the respectability of their members, seemingly make it
difficult for a board member to speak out. As Buffet stated “it’s
almost impossible, for example, in a boardroom populated by well-mannered
people, to raise the question of whether the CEO should be replaced. It’s
equally awkward to question a proposed acquisition that has been endorsed by the
CEO, particularly when his inside staff and outside advisors are present and
unanimously support his decision. (They wouldn’t be in the room if they didn’t.)
Finally, when the compensation committee – armed, as always, with support from a
high-paid consultant – reports on a mega grant of options to the CEO, it would be
like belching at the dinner table for a director to suggest that the
committee reconsider.”

Buffet is implying that
board members are effectively a rubber stamp for the executive (that is
especially the case when a director is on multiple boards and is severely
time-poor). It could be argued that despite the corporate governance rhetoric,
the smaller boards of Gunns and Patricks (which incidentally are two of the best
performing companies over the past decade) are actually beneficial for
shareholders.

Read the full story on the Crikey website here.

Stephen Mayne replies:

Adam, you’re making a completely different argument. I’m not saying big
or small boards are good or bad, but simply making the point that if
the owners of a company want to increase the size of the board, who is
that board to unilaterally declare that this can’t be done if it would
be within the limits prescribed in the constitution? My beef is all about shareholder rights.

Peter Fray

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