Saturday 7 June 2008

UK: limiting the size of the company's board

The UK Companies Act (2006) does not impose an upper limit on the number of directors that can be appointed to a company board. Section 154 of the Act does, however, set a minimum number of directors: two for a public company and one for a private company. Moreover, Section 155 (which comes into force on 1 October 2008) provides that all companies must have at least one director who is a natural person.  

Companies can, if they wish, set a maximum number of directors in their articles of association. Marks and Spencer plc is planning to adopt such a provision. In the Notice for its forthcoming AGM, M&S explains its proposal to include in its articles a new term which will limit the size of its board to 20 directors. M&S says that this reflects "current best practice". What is this best practice to which M&S refers?  The Combined Code does not impose a limit on board size but it does state that "[the] board should not be so large as to be unwieldy" (A.3). Sir Adrian Cadbury has provided a further insight: in his book Corporate Governance and Chairmanship: A Personal View (Oxford: OUP, 2002) he observed that a limit of 10 was "an admirable starting point for any consideration of board size" (p. 51).

Postscript (8 June 2008): 

Interestingly, Tesco plc, at its forthcoming AGM, will be seeking shareholder approval for the removal of a cap on the number of directors in its articles. The company states that this will provide "more flexibility". Tesco's existing articles set a limit of 16.  See this Notice for further information.  

Another FTSE100 company - Centrica - has altered its articles this year and has included a cap of 20 directors on the board. The company has explained why in the Notice sent to shareholders: "Following guidance from the Association of British Insurers, published since the current Articles were brought into force, the Company has decided to insert a provision into the New Articles to allow for a maximum number of twenty Directors of the Company".

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