Threats to board stability: Understanding SME director behavior

Abstract

Of the more than one-third of US firms rated low in corporate governance (GMI), most (86 per cent) have underperforming boards – a cause of considerable concern given growing evidence of a positive relationship between firm governance and financial performance. Most governance research has focused on board demographics to explain governance quality, but we answered a call – reflecting a surge of recent work on teamwork in contexts – for empirical inquiry of the sparsely researched link between board dynamics and governance. Semi-structured interviews with 23 board directors of the United States publically traded small and medium sized enterprises (SMEs) with high and low independently-attributed governance ratings and analysis of financial performance data of the firms they serve revealed surprising differences between the two groups with respect to how they recruit directors, manage conflict both in and beyond the formal boardroom and deal with deviant director behavior – factors, our results suggest, that affect both board stability and performance. We interpreted our results referencing sociologist Erving Goffman's classic dramaturgical framework of ‘self-presentation in everyday life’, discovering in the vivid narratives of board directors evidence of how tacit social norms govern behavior in frontstage (boardroom) and backstage (extra-boardroom) member interaction. Directors are commonly selected to join boards based on their professional capital, but are seldom screened for understanding and appreciation of appropriate behavior inside and outside the boardroom or ability and willingness to address affective conflict in either realm. Directors insensitive to differences between ‘front stage’ and ‘back stage’ behavior, however, may suffer diminished individual performance and tenure on boards and weaken board effectiveness. High governance-rated organizations appear to have a lower tolerance for aberrant director behavior and a stronger inclination to address and resolve affective conflict than low-rated firms. Our results have implications for both practice and future research. Only 1 of the 22 firms (4.5 per cent) in our sample screened candidate directors for behavioral competencies. Failure to do so, our findings reveal, may result in higher levels of affective conflict inside and outside the boardroom, higher levels of board attrition, lower consequent levels of stability and ultimately lower governance quality. Our work contributes to a still lean body of work on board process, recently assessed to account for only 12 per cent of governance research. Board governance, consequently, remains a ‘black box’ begging for light.