Board Composition: A Strategic Asset or Challenging Weakness

Board composition is either a cornerstone for corporate success or an anchor that weighs down financial performance.

Directors shape strategic direction and support management in navigating complex risks, and boards can wield immense power and influence as stewards of an organization. Given the strategic value of a high-performing board, the key questions are: What do the data points indicate about the most effective board composition, and what are the main attributes of high-performing board members?

Performance Factors

To assess whether board composition impacts company performance, Alvarez & Marsal reviewed high- and low-performing companies’ total shareholder return (TSR) across a three-year period from 2022–2024; TSR captures changes in share price and any dividends that are assumed to be reinvested.

In our study, we analyzed board composition and relative performance data from a population of 3,347 companies headquartered in the United States and across Europe. The companies had a market capitalization of $200 million or higher across all sectors. Peer sets are based on the 120 subsector taxonomy and allocation as used by Capital IQ. High-performing companies were those in the top quartile and low-performing companies were those in the bottom quartile of TSR.

Since companies were compared to their global peers, it is worth noting that the S&P 500 (up 25 percent) outperformed its equivalent European index, the Stoxx 600 (up 4 percent), over the last three years. Within that timeframe, though, some companies generated stronger returns than others.

Below are the factors that stood out when analyzing high-performing and low-performing company boards:

1. Tenure. On average, directors serving on the boards of high-performing companies had longer tenures. While average tenure varied by industry, the average tenure of a director serving on the board of a high-performing company (8.5 years) was nearly 19 percent longer than that of a director serving on the board of a low-performing company (7.3 years).
2. Board refreshment. Boards of high-performing companies had a member tenure range that was nearly 11 percent wider than that of the boards of low-performing companies. This suggests that these boards have a healthy mix of long-serving members and new directors. In other words, regularly updating who serves on the board, while still retaining experienced members, contributes to better performance.
3. CEO and chair separation. Companies that separated the CEO and chair roles outperformed all of their peers that combined the CEO and chair roles by 1.4x.
4. Board size. The average board size for Fortune 100 companies is 11.8 directors, and the average board size for Russell 2000 companies is 8.9 directors. The Fortune 100 boards with more than 12 directors outperformed their subsector peers by 2.6x. The opposite is true for the Russell 2000: companies with boards composed of less than eight members outperformed companies with larger boards by 6.3x. Fortune 100 companies appear to be leveraging larger boards because of their maturity, the complexity of issues they face, and the need of diverse industry expertise. Russell 2000 companies seem to be nimbler, with smaller boards focused on specific industries and growth vectors.

Intangible Characteristics

Beyond the quantitative metrics that show which full-board characteristics may lead to better company performance are the qualitative complements of individual directors. To build a well-rounded group of members, boards should do the following:

1. Balance technical skills. Strive for a balanced mix of broad and specialized expertise, such as directors with multidisciplinary, executive, or strategic experience, alongside those with deep technical knowledge in roles such as an audit partner, an investment banker, or a chief people officer. Research conducted for this article suggests that there is an advantage to having at least 35 percent of board members possess deep, technical, and narrow expertise.
2. Leverage complementary industry and market expertise. While experience is vital, board members do not need to have the same industry experience to be successful. For example, a company selling mobile phones can benefit from a board member with experience selling computers. Additionally, a company with exposure to multiple markets should consider board members with relevant regional expertise. If a company has a presence in the Pacific Northwest and the Midwest, having board members familiar with these markets can enhance strategic planning and decision-making.
3. Seek candidates with strong networks. Directors with robust relationships can open doors to potential investors, strategic partners, key talent, and even policy influencers. Their ability to make meaningful introductions and build connections can help management create new opportunities and strengthen the company’s market position.
4. Weigh the culture fit. Ensure members are a fit for the board’s culture, whether that is an entrepreneurial spirit or one bent toward long-term strategic approaches to solving problems. Neither is a wrong choice, just different, and the right fit will certainly have an impact on optimizing your board for success. It is important to be mindful when appointing directors to ensure that you do not exclude the right candidate for the wrong reasons. A strong cultural fit ultimately enhances collaboration, sharpens strategic focus, and drives better outcomes for the board and company.

Build a Successful Board

The composition of your board of directors is more than just a formality; it is a strategic differentiator. The most successful boards are those that are proactive, data-driven, and committed to continuous improvement. It is not only about who has a seat at the table but also about how boards use the quantitative and qualitative points outlined above to lay the foundation for sustained success and resilience in an unpredictable future.

The views expressed in this article are the authors’ own and do not represent the perspective of NACD.

Alvarez & Marsal is a NACD partner, providing directors with critical and timely information, and perspectives. Alvarez & Marsal is a financial supporter of the NACD.

Annie Peabody is a managing director with Alvarez & Marsal.

Conor Johnston is a managing director with Alvarez & Marsal.

Andy Walker is a managing director with Alvarez & Marsal.

Paul Kinrade is a managing director with Alvarez & Marsal.