Correlates of board empowerment in small companies.

This study seeks to advance the understanding of board empowerment in small companies. Predictions based on agency and resource dependency theories were used to examine how contingency factors correlate with board empowerment, in this study conceptualized as a larger number of board members, a higher representation of outside directors, and separate CEO and board chair positions. Statistical analyses on a sample of 135 small companies gave ample support for the agency-theoretic prediction that board empowerment in small companies is a response to satisfy the demands from owners not directly involved in managing the company. Other factors influencing board empowerment were younger CEOs, high degree of exports, and past poor company performance. The influence of these contingency factors, however, was not as strong and extensive as the presence of outside owners. The article ends with a discussion of the findings and their implications for understanding boards and governance in small companies.

Introduction

The attention to corporate governance and boards of directors has grown considerably during the last couple of years. The bulk of studies have focused on large publicly held corporations (Gabrielsson & Huse, 2004; Johnson, Daily, & Ellstrand, 1996), but there are also other research streams emerging in the field, such as studies on the role of boards in small and entrepreneurial companies (Daily, McDougall, Covin, & Dalton, 2002; Huse, 2000). This growing stream of research has shown that active and empowered boards in small companies can provide assurance to critical strategic issues facing their operations while protecting their assets (Fiegener, 2005; Huse, 1998). Empowered boards can also be of particular value to help small companies renew themselves in a timely fashion by exploring new market opportunities as well as facilitating product development strategies (George, Wood, & Khan, 2001; Zahra, Neubaum, & Huse, 2000). An empowered board-broadly referring to a board that has the capability and independence to take action and assert power--can consequently be seen as a highly valued organizational asset in small companies.

An important condition for effective board empowerment is that the board's composition and leadership structure enable board members to take action and assert power (Lorsch, 1995). The general characteristics of small companies, however, speak against empowered boards (Huse, 1990; Mace, 1971; Rosenstein, 1990). Increasing the number of board members beyond the minimum requirement of directors can, in this respect, be valuable for the small company, as it also increases the pool of critical guidance, counsel, and resources. The adoption of outside directors, moreover, is often considered critical for increasing a board's ability to make independent judgments and challenge managerial suggestions (Fiegener, Brown, Dreux, & Dennis, 2000; Ward & Handy, 1988). In addition, separating CEO and board chair positions can significantly influence a board's ability to undertake its responsibilities, as the dual leadership structure seriously compromises the board's ability to set its own agenda (Daily & Dalton, 1992a; Huse, 1990). A larger number of board members, a higher representation of outside directors, and a separation of CEO and board chairperson roles can therefore be regarded as important prerequisites for board empowerment in small companies.

Although the value of empowered boards has long been recognized among entrepreneurship and small-business scholars (Bennett & Robson, 2004; Castaldi & Wortman, 1984; Hughes, 1995; Nash, 1988), there have been very few empirical studies actually investigating board empowerment in smaller companies. Further, the few studies addressing the issue have primarily focused on the adoption of outside directors (e.g., Fiegener et al., 2000; Westhead, 1999) while leaving other aspects of board empowerment, such as increasing the number of board members or separating CEO and board chair positions, largely unexplored. Employing a broader conception of board empowerment could, in this respect, be highly valuable for both theory and practice, not least because an excessive focus on the adoption of outside directors may risk limiting the understanding of board empowerment as a wider range of possible empowerment alternatives in small companies.

Previous debates about boards of directors in small companies have indeed been rather simplistic. A common view has been that CEOs have the authority to overrule boardroom decisions and also to directly remove directors (Mace, 1971; Rosenstein, 1990). This means that boards in small companies mainly are seen as passive entities, pure legal constructions or rubber-stamping bodies made up of family members with no ability to contribute to the strategic direction or performance of the organization. Alternative streams of research, on the other hand, have emphasized that boards in small companies can, and often do, play an active role in shaping company strategy and influencing its performance (e.g., Daily et al., 2002). Without choosing any of these stances beforehand, the argument put forth in this study is that, although the general characteristics of small companies speak against empowered boards (Huse, 1990; Mace, 1971), there may be contingency factors that force (or enable) boards in small companies to be empowered. The knowledge of how critical contingency factors influence board empowerment in small companies is, nonetheless, largely limited to date, despite the fact that a better understanding of these relationships can be seen as important for predicting the effectiveness with which directors perform their duties (Huse, 2000; Lynall, Golden, & Hillman, 2003).

Based on the previous discussion, the research problem motivating this article is the limited knowledge of how contingency factors may influence board empowerment in small companies. The study will meet this research problem by using reasoning from both agency and resource dependency theories to examine how contingency factors correlate with board empowerment, in this study conceptualized as a larger number of board members, a higher representation of outside directors, and separation of CEO and board chair positions. These three measures have regularly been used as indicators of boards' discretion and potential influence over the direction and performance of a company (Huse, 2000; Johnson et al., 1996).

The rest of the article is structured as follows. The second section presents a brief review of the characteristics of small companies, followed by the development of hypotheses based on reasoning from agency and resource dependency theories. Next comes a section describing the methods, sample, and variables. Then, the results from the statistical analyses are presented. This is followed by a discussion of the findings. In the concluding section, future research challenges in the field of boards of directors in small companies are identified.

Board Empowerment in Small Companies

A starting point for examining correlates of board empowerment in small companies is to consider the context in which they operate. Small companies are generally described in the literature as less structurally complex and less formalized than larger publicly held companies (d'Amboise & Muldowney, 1988). Smaller organizations are also generally characterized by flat management structures and an organic organizational structure with multiple informal networks to coordinate flows of capital, labor, and information (Mintzberg, 1979). This orientation makes them much more able to respond quickly to opportunities, although they may not be able to commit large resources to exploit a new opportunity (Wiklund & Shepherd, 2003). Small companies, moreover, often have ownership and control consolidated in one or a few individuals, and a relatively small share of the total market (Storey, 1994). Based upon these findings, it seems fair to argue that small companies' characteristics generally speak against active and empowered boards. Having a board of directors may, e.g., be perceived as more of a hindrance than a benefit, and CEOs may thus not welcome empowered boards, fearing that such boards may challenge their authority or hinder their flexibility (Ranft & O'Neill, 2001; Rosenstein, 1990). Instead, CEOs may exercise power over the board through their central role in director selection and remuneration, and by shaping the information provided to directors (Johannisson & Huse, 2000; Ward & Handy, 1988).