Supervisory boards in high growth SMEs and mandated board members: two dilemmas

Abstract

Two dilemmas for boards of growing small and medium-sized enterprises in a two-tier context as a result of their need for external resources (i.e., capital) and the concomitant introduction of external directors (expertise) are discussed in this paper. Firstly, split loyalties can occur when an externally mandated non-executive director may be pressured to act primarily in the interests of his/her mandating firm (e.g., a major investor), which may diminish the incentive to act in the best interest of the focal firm. Secondly, a culture clash is likely when external directors in the much prevalent family-based SME prefer formal control above informal governance which may harm the board's effectiveness. We propose that a one-tier board structure in combination with an effective chairperson is a solution to mitigate both dilemmas.