Corporate Governance and Strategic Change in SMEs: The Effects of Ownership, Board Composition and Top Management Teams

This paper investigates how governance mechanisms affect the ability of small- and medium-sized enterprises (SMEs) to introduce strategic change. Previous research typically assumes that governance mechanisms operate independently of each other. Building on agency theory and insights from the literature on small firm governance, we hypothesize that governance variables related to ownership, the board of directors and the top management team all affect strategic change and that it is important to examine the interaction effects of these governance mechanisms. Using a longitudinal sample of over 800 SMEs, our general logic and hypotheses are supported by the analyses. We find that closely held firms exhibit less strategic change than do SMEs relying on more widespread ownership structures. However, to some extent, closely held firms can overcome these weaknesses and achieve strategic change by utilizing outside directors on the board and/or extending the size of the top management teams. Implications for theory and management practice in SMEs are discussed.

[1]  M. Huse.  Boards of directors in SMEs: a review and research agenda , 2000 .

[2]  E. Fama.  Agency Problems and the Theory of the Firm Author ( s ) : , 2007 .

[3]  M. Carney.  Corporate Governance and Competitive Advantage in Family–Controlled Firms , 2005 .

[4]  Douglas D. Moesel,et al.  Corporate Divestiture Intensity in Restructuring Firms: Effects of Governance, Strategy, and Performance , 1994 .

[5]  John A. Davis,et al.  Generation to Generation: Life Cycles of the Family Business , 1997 .

[6]  Myles L. Mace,et al.  Directors: Myth and Reality , 1971 .

[7]  M. Lubatkin,et al.  Toward a theory of agency and altruism in family firms , 2003 .

[8]  A. Seth,et al.  Boards of directors and substitution effects of alternative governance mechanisms , 1995 .

[9]  B. Golden,et al.  When will boards influence strategy? Inclination × power = strategic change , 2001 .

[10]  Patrick T. Gibbons,et al.  Influences on Strategic Planning Processes among Irish SMEs , 2005 .

[11]  W. Boeker,et al.  Turbulence at the top: a new perspective on governance structure changes and strategic change. , 1991, Academy of Management journal. Academy of Management.

[12]  M. Huse,et al.  Informal Strategic Networks and the Board of Directors , 1993 .

[13]  M. Lubatkin,et al.  Agency Relationships in Family Firms: Theory and Evidence , 2001 .

[14]  Mark K. Fiegener.  Determinants of Board Participation in the Strategic Decisions of Small Corporations , 2005 .

[15]  Jonathan L. Johnson,et al.  Boards of Directors: A Review and Research Agenda: , 1996 .

[16]  Sara L. Keck.  Top Management Team Structure: Differential Effects by Environmental Context , 1997 .

[17]  Edward J. Zajac,et al.  Managerial Incentives, Monitoring, and Risk Bearing: A Study of Executive Compensation, Ownership, and Board Structure in Initial Public Offerings , 1994 .

[18]  John L. Ward,et al.  Preparing Your Family Business for Strategic Change , 1997 .

[19]  Frances J. Milliken,et al.  Cognition and corporate governance: Understanding boards of directors as strategic decision making groups , 1999 .

[20]  A. Shleifer,et al.  A Survey of Corporate Governance , 1996 .

[21]  M. Lerner,et al.  Frontiers of Entrepreneurship Research , 2003 .

[22]  Manfred F. R. Kets de Vries,et al.  The dynamics of family controlled firms: The good and the bad news. , 1993 .

[23]  D. Hambrick,et al.  Upper Echelons: The Organization as a Reflection of Its Top Managers , 1984 .

[24]  B. Johannisson,et al.  Recruiting outside board members in the small family business: an ideological challenge , 2000 .

[25]  Sam Fullerton,et al.  Stage of the organizational life cycle and competition as mediators of problem perception for , 1994 .

[26]  L. Steier,et al.  Guest editorial A commentary on family business entrepreneurial developments , 2004 .

[27]  Michael A. Hitt,et al.  Conflicting Voices: The Effects of Institutional Ownership Heterogeneity and Internal Governance on Corporate Innovation Strategies , 2002 .

[28]  Violina P. Rindova,et al.  WHAT CORPORATE BOARDS HAVE TO DO WITH STRATEGY: A COGNITIVE PERSPECTIVE* , 1999 .

[29]  Henry Mintzberg,et al.  Strategy safari : a guided tour through the wilds of strategic management , 1998 .

[30]  M. Jelinek.  Managing change for competitive success , 1993 .

[31]  M. Wright,et al.  Corporate Governance, Accountability and Enterprise , 1998 .

[32]  Robert N. Stern,et al.  The External Control of Organizations: A Resource Dependence Perspective. , 1979 .

[33]  P. Davidsson,et al.  What Do They Think and Feel about Growth? An Expectancy–Value Approach to Small Business Managers’ Attitudes toward Growth 1 , 2003 .

[34]  Matts Kärreman,et al.  Board Activities and the Denationalization of Ownership – The Case of Sweden , 2004 .

[35]  R. Cyert,et al.  Theory of the Firm , 1966 .

[36]  Shaker A. Zahra,et al.  Boards of Directors and Corporate Financial Performance: A Review and Integrative Model , 1989 .

[37]  Gregory G. Dess,et al.  Clarifying the Entrepreneurial Orientation Construct and Linking It To Performance , 1996 .

[38]  K. Eisenhardt.  Agency Theory: An Assessment and Review , 1989 .

[39]  Johan Wiklund.  Small Firm Growth and Performance : Entrepreneurship and Beyond , 1998 .

[40]  Shaker A. Zahra,et al.  Relational and Contractual Governance in Family Firms: Effects on Strategic Decision Making , 2002 .

[41]  M. Lubatkin,et al.  Altruism, agency, and the competitiveness of family firms , 2002 .

[42]  Alfred D. Chandler,et al.  Scale and Scope: The Dynamics of Industrial Capitalism , 1992 .

[43]  Allen C. Amason.  Distinguishing the Effects of Functional and Dysfunctional Conflict on Strategic Decision Making: Resolving a Paradox for Top Management Teams , 1996 .

[44]  Robert E. Hoskisson,et al.  The Composition of Boards of Directors and Strategic Control: Effects on Corporate Strategy , 1990 .

[45]  Allison W. Pearson,et al.  An Exploratory Comparison of the Behavioral Dynamics of Top Management Teams in Family and Nonfamily New Ventures: Cohesion, Conflict, Potency, and Consensus , 2005 .

[46]  J. Liebeskind,et al.  The effects of ownership structure on corporate restructuring , 1993 .

[47]  Dan R. Dalton,et al.  Board of Directors Leadership and Structure: Control and Performance Implications , 1993 .

[48]  Shaker A. Zahra,et al.  Ownership and the Internationalization of Small Firms , 2005 .

[49]  Warren Boeker,et al.  Strategic Change: The Effects Of Founding And History , 1989 .

[50]  Edward J. Zajac,et al.  The Costs and Benefits of Managerial Incentives and Monitoring in Large U.S. Corporations: When is More not Better? , 1994 .

[51]  M. C. Jensen,et al.  Harvard Business School; SSRN; National Bureau of Economic Research (NBER); European Corporate Governance Institute (ECGI); Harvard University - Accounting & Control Unit , 1976 .

[52]  Jacob Cohen,et al.  Applied multiple regression/correlation analysis for the behavioral sciences , 1979 .

[53]  M. Tushman,et al.  Organizational Evolution: A Metamorphosis Model of Convergence and Reorientation , 1985 .

[54]  John A. Pearce,et al.  Turnaround: Retrenchment and recovery , 1992 .

[55]  D. Leonard,et al.  The Role of Tacit Knowledge in Group Innovation , 1998 .

[56]  Humphry Hung,et al.  A typology of the theories of the roles of governing boards , 1998 .

[57]  Allen C. Amason,et al.  The Effects of Top Management Team Size and interaction Norms on Cognitive and Affective Conflict , 1997 .

[58]  Donald O. Neubaum,et al.  The Effects of Ownership , 2007 .

[59]  Richard A. Johnson,et al.  The Effects of Corporate Governance and Institutional Ownership Types on Corporate Social Performance , 1999 .

[60]  Pramodita Sharma,et al.  Strategic Management of the Family Business: Past Research and Future Challenges , 1997 .

[61]  Mike Wright,et al.  Corporate governance: From accountability to enterprise , 1999 .

[62]  M. Cowling.  Productivity and Corporate Governance in Smaller Firms , 2003 .

[63]  Morten Bennedsen,et al.  The balance of power in closely held corporations , 2000 .

[64]  D. Slevin,et al.  Strategic management of small firms in hostile and benign environments , 1989 .

[65]  S. Floyd,et al.  Middle management involvement in strategy and its association with strategic type: A research note , 1992 .

[66]  M. Wright,et al.  Entrepreneurial Founder Teams: Factors Associated with Member Entry and Exit , 2003 .

[67]  R. Ford.  Outside Directors and the Privately-Owned Firm: Are They Necessary? , 1988 .

[68]  J. Kimberly,et al.  The Dynamics of Organizational Development and Change: How the Past Shapes the Present and Constrains the Future , 1995 .

[69]  Andrew Pettigrew,et al.  On studying managerial elites , 1992 .

[70]  Marshall W. Meyer,et al.  Permanently Failing Organizations. , 1991 .

[71]  Scott A. Snell,et al.  External control, corporate strategy, and firm performance in research‐intensive industries , 1988 .

[72]  E. Fama,et al.  Separation of Ownership and Control , 1983, The Journal of Law and Economics.

[73]  Kanak Gautam,et al.  The effects of board size and diversity on strategic change , 1994 .

[74]  M. Nordqvist,et al.  Ownership Structure, Board Composition and Entrepreneurship : Evidence from Family Firms and Venture-Capital Backed Firms , 2004 .

[75]  Atulya Sarin,et al.  Agency Problems, Equity Ownership, and Corporate Diversification , 1997 .