The relationship between governance structure and corporate performance in entrepreneurial firms

Abstract

Organizational scholars and practitioners alike continue to focus on the role of chief executive officers and boards of directors in small and entrepreneurial firms. The popular business literature suggests strong linkages between these individuals and firm performance among the largest firms; however, this linkage may be strongest in the more modestly sized firm. While there is little agreement concerning the nature and strength of this relationship, it is clear that this issue remains a fruitful area of investigation. This study examines the organizational agent/firm performance linkage focusing specifically on the role of founder chief executive officers (CEOs) and the composition of the boards of directors. Extant research would suggest that founder CEOs rely on dysfunctional governance structures (e.g., CEO duality, lower numbers of outside directors, lower proportions of outside directors) to a greater extent than their non-founder counterparts. Additionally, it is believed that these inappropriate governance structures will be associated with decreased firm performance. The 1989 Inc. 100 corporations provide the sample of firms to test these propositions. The data reveal that CEOs of these successful entrepreneurial firms do not demonstrate a tendency to adopt inappropriate governance structures. This finding is contrary to related research which has found that stable small corporation founder CEOs are less likely to utilize prescribed governance structures, jeopardizing firm performance. Founder CEOs of the Inc. 100, however, apparently realize the benefit of outside direction and elect to rely on the independent structure and outside board direction in similar degrees as their non-founder cohorts. The CEO's ability to sacrifice some measure of control by inviting outside direction may contribute to the overall high performance of this sample of firms. While no performance differences were apparent under either dual or independent board leadership, modest performance advantages were found with greater numbers and proportions of outside directors. These findings provide some support for the ability of founder and non-founder CEOs to relinquish the tight control and effectively guide the growth of the firm. The board of directors, then, provides a sensible tool when striving for the goal affirm growth. While it is unlikely that there is one optimal board configuration that will effectively guide the entrepreneurial firm to success, utilizing the expertise and resources provided by outside directors appears to enable the desired growth. Future investigations in this area may provide further understanding of the value of outside assistance and the specific types of outside directors that may best contribute to firm performance.