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Governance structures in high-growth firms
Abstract
This paper addresses the structure of governance systems in high-growth firms. The OECD Principles of Corporate governance state that ”. The Principles focus on publicly traded companies, both financial and non-financial. However, to the extent they are deemed applicable, they might also be a useful tool to improve corporate governance in non-traded companies, for example, privately held and state-owned enterprises” (OECD p.11). The “extent to which they are deemed applicable” for high-growth firms is the topic of this paper. We propose that high-growth firms have specific characteristics and challenges that may warrant other governance structures than are recommended in the governance codes. In the present study, we compare a sample of 865 high-growth firms in Norway with a statistically representative sample of 396 SMEs in Norway, on several general characteristics as well as on their governance structures. The findings show that high-growth firms do have specific characteristics that distinguish them from other smal and medium sized enterprises. The high-growth firms in our sample are significantly younger and smaller than the average SME, and their growth intentions are significantly stronger. They also face greater difficulties in recruiting sufficient qualified personnel. Further, the high-growth firms differ in their governance structure on several aspects. They have more owners than the average SME, and in 81.4 % of the high-growth firms the founder has the three roles of owner, director on the board, and a top management position simultaneously. The results also show that the high-growth firms have significantly different board compositions than the SMEs. The boards in this sample are larger, the proportion of independent directors on the boards is larger, and the boards are more gender diverse (21 % women) than in the SME sample. We discuss these findings in light of general OECD governance principles, and whether high-growth firms might represent some “best practice” examples for SMEs, considering their successful growth histories. Introduction
High-growth firms make a huge contribution to employment and value creation in a society. It has been shown that these firms generate a disproportionately large share of new jobs compared to non- high-growth firms, even during a recession . High-growth firms typically constitute 2-5% of the total business population in a country . Clayton and col eagues found that in the U.S., 2 % of the population of firms in 2012 were high-growth firms, yet they were responsible for 35 % of all gross job gains between 2009 and 2012 . In Norway, the 4% most rapid growing firms contributed with 50% of al new net employments in the country between 2008 and 2012. Thus, despite the small number of firms within the high-growth category, their impact on value creation and employment is substantial. This great economic impact of high-growth firms makes them both important and interesting to study. How are they different from other firms and how are they managed and governed? In this paper we shall focus on the corporate governance structures of these firms, and investigate how these structures are related to the specific characteristics of high-growth firms. Specifically, we shall investigate whether there might be specific forms of corporate governance that may fit a high-growth strategy in young firms, and discuss whether these structures may deviate from the “standard” principles of corporate governance. The purpose of corporate governance is basical y to direct and control the company so its conduct is in accordance with the stakeholders’ interests. Although corporate governance codes vary substantially between countries, there is a general agreement that it is the boards of directors that are responsible for the corporate governance of their companies. The Cadbury Report, published in the UK in 1992 and stil the basis of corporate governance codes throughout Europe , describes the corporate governance tasks as the following: .” The shareholders’ role in governance is to appoint the directors and the auditors and to satisfy themselves that an appropriate governance structure is in place. The responsibilities of the board include setting the company’s strategic aims, providing the leadership to put them into effect, supervising the management of the business and reporting to shareholders on their stewardship” . Thus, the main actors involved in the implementation of corporate governance in a company are the shareholders, the board of directors, and the CEO . This paper addresses the roles and structure of these actors, and how the corporate governance is structured and implemented, in high- growth firms. Corporate governance codes are generally aimed at publicly traded firms, but are recommended as guidelines also for other kinds of companies, such as privately owned and limited liability firms. The OECD Principles of Corporate governance state that ”. The Principles focus on publicly traded companies, both financial and non-financial. However, to the extent they are deemed applicable, they might also be a useful tool to improve corporate governance in non-traded companies, for example, privately held and state-owned enterprises” (OECD p.11). The “extent to which they are deemed applicable” is precisely the topic of this paper. Thus, it is often assumed that good governance can be defined across firms and contexts : .”The ‘holy trinity’ of good corporate governance has long been seen as shareholder rights, transparency and board accountability” . The Norwegian corporate governance codes state that “Good corporate governance wil strengthen confidence in companies, and help to ensure the greatest possible value creation over time in the best interests of shareholders, employees and other stakeholders” (NUES 2012). However, as we shall discuss throughout this paper, the role of the owners, the board and the CEO is quite different in young and growing firms than in older, mature companies, and these roles may be manifested in special governance structures. Actually, in Norway, publicly traded companies, although responsible for a major part of the economic value creation in the country, constitute a smal minority of the country’s population of companies. Thus, developing principles of good governance for privately held, small and medium-sized enterprises is an important task. And within this population, high-growth firms in turn constitute a small minority. In the present study, we aim to show on what aspects high-growth firms differ from the “average SME” and how these characteristics may warrant specific governance structures. We investigate this empirically through comparing a sample of high-growth firms with a statistically representative sample of SMEs The paper is organized as follows. We start by outlining three general principles of corporate governance, derived from the published codes in Norway and OECD, and how these are suggested to be manifested in the governance practices of companies. We then present some examples of research on these central principles of good governance. Turning to the characteristics of high- growth firms, we discuss the appropriateness of codes of practice as well as theories of corporate governance for high-growth firms. Then we do descriptive empirical analyses in three steps. First, we compare our sample of high-growth firms with previous research on these kinds of firms on several characteristics, to provide a rich and empirically founded description of the nature of high-growth firms. Second, we compare structural aspects of corporate governance in the high-growth firms with the representative sample of SMEs. Finally, we discuss the relevance of the general governance principles for high-growth firms, and whether high-growth firms might represent some “best practice” examples for SMEs, considering their successful growth histories. General principles of corporate governance
The first principle of corporate governance is to protect shareholders’ rights, and the board members are appointed as the shareholders’ representatives, to serve their interests as owners. Thus, the number of owners and the owners’ interests will heavily influence board composition, as well as how the tasks and responsibilities of the board are defined in a company. Regarding the board composition, the corporate governance codes are focusing on competence and independence of the board members. Diversity of competences may be required for the board in order to cover the areas needed for making good decisions. Further, the board’s independence of specific owners is underscored, the Norwegian codes of practice state: ”.The composition of the board of directors should ensure that it can operate independently of any special interests. The majority of the shareholder-elected members of the board should be independent of the company’s executive personnel and material business contacts. At least two of the members of the board elected by shareholders should be independent of the company’s main shareholder(s)”. (The Norwegian Corporate Governance Board (NCGB) p. 31). Further, the separation of owners and the company’s executive management is underscored: .”The board of directors should not include executive personnel. If the board does include executive personnel, the company should provide an explanation for this and implement consequential adjustments to the organization of the work of the board, including the use of board committees to help ensure more independent preparation of matters for discussion by the board” (p. 31). We see that independence of the directors has a crucial role in the codes; as one of the roles of the board of directors is to control and supervise the executive management, and so they should operate independently. Further, the recommendation that some board members should be independent also of owners is intended to reduce possible bias in the board towards particular owners’ interests. It is underscored in the recommendation that the board members should act as a col ective body, independent of single owners, and that they should have the expertise, and time available, to be able to perform its assigned tasks. Thus, we see three crucial arguments in these codes that we shall address in this paper. The first is independence – that the board should be independent of specific owners, have independent board members, and act as a collective. The second is competence and effort – to secure that the directors are both competent and will dedicate sufficient time and effort so secure board effectiveness. These recommendations are also related to the fact that historically, many companies have had passive boards with insufficient strength to carry out good governance. The third principle is the role of the executive manager – the CEO is not allowed to be a member of a board in Norway, and the Norwegian Code of Practice actual y recommends that no executive personnel should be a member of the board at all (the issue of CEO duality is not mentioned in the OECD principles). Governance chal enges in the high-growth phase of a firm’s life cycle
In the high-growth phase, a firm typically must create and develop internal structures, increase coordination and communication, and manage new functions and organizational units . A life cycle perspective is particularly suitable for identifying the characteristics and challenges of high-growth firms. Depending on the model selected, a firm’s life cycle will include three or four stages; the second stage in both models is characterized by rapid growth. Firms at the high-growth stage may consider transitioning to public ownership and may investigate other methods of expansion . Furthermore, these firms often add new products and markets into their product portfolios during this phase. A firm in the growth stage of its life cycle thus faces many demands, some of which conflict with one another. Internal and external complexity rapidly increases during the growth stage, but formal strategic planning systems seldom develop in tandem with these In a review of small firm growth, Macpherson and Holt note that “. .growth cannot be achieved without managerial capabilities to provide specialist functions and processes designed to support and exploit entrepreneurial actions”. Several studies indicate that the boards of directors are critical to the development of a growth strategy in young, high-growth firms . In the early stages of a firm's life cycle, the separation between ownership and control is proposed to be less relevant than in publicly traded firms because CEOs (and founders) typically have financial interests that are aligned with those of the firm owners . High-growth firms may thus have fewer agency problems and less of a need for ownership control and management monitoring than do larger, mature firms . However, at this stage, the increased need for external financing may represent an exchange of power from the CEO (or the founder) to the sources of financing, the investors or owners. As the founder often has a central role in the management of the firm at this stage, this may create conflict or power struggle between the new owners and the founder Thus, the founder and the investors are together the decision makers on board composition . While there might be a potential conflict of interest between the founder and the new owners, a crucial criterion for venture capitalist in their investment decisions is their belief in the founder’s competence, so the founder will probably have substantial power in composing the board as well. Further, at this stage the issue of the founder’s role in leadership and ownership of the company will become increasingly present and the governance structure will be affected by this situation accordingly. Thus, balancing these powers with the principles of good governance is a major challenge for a successful strategic leadership of the company. Two points can at this point be made about this: first, that the founder may have many different roles in the company , and, second, that there are strong indications from earlier research that founder-managed firms perform better than professionally managed firms . These two points will be discussed In the next section we shal discuss how the particular characteristics of high-growth firms may have implications for the corporate governance structure, particularly on the three principles discussed Research on principles of corporate governance
The principle of independence is central in agency theory, which predicts that outside directors (not involved in the firm’s operations) wil better monitor management, and hence reduce management’s propensity to pursue self-interest and to capitalize personally on internal knowledge of the firm . However, in their meta-study of the relationship between board composition, board leadership structure and firm performance, Dalton et al. found no overall correlation between the presence of independent directors and firm financial performance . This may be related to the fact that outside directors may have many different roles, and are oftentimes appointed by the CEO . Further, there are empirical findings indicating that board members with substantial ownership in the firm do improve the effectiveness of the corporate governance system. Core et al. found that firms with weaker governance systems had greater agency problems and that the CEO in these companies extracted greater compensation (the magnitude of the compensation used as an indication of a weak board). Their study showed that in firms that had internal board members with more that 5 % of the shares, the CEO compensation was lower, which suggests a more effective governance system. The codes of practice mention two kinds of independence. One is that a board should have directors that are independent of specific owners, to increase the board’s ability to function as a collective, working for all shareholders. The other is what is often labeled external directors – i.e. directors who are not involved in the company’s executive management, nor have any operational One of the most challenging tasks in young firms is to attract venture capital to secure growth. High- growth firms have to some degree already succeeded in this, as they have managed to sustain high growth for several years. Investing in young, entrepreneurial firms that pursue growth is risky, and high-risk investments will often be accompanied by demands for high returns . Thus, we would expect the shareholders to be actively engaged in the management of the firm, through the board. Further, considering the risk, it is plausible to suggest that the larger the number of owners of a firm in this phase, the more difficult to reach agreements among the owners, and the more the power is dispersed. Thus, we suggest that investors would prefer to keep the number of owners low. So, in high-growth firms, we would expect to see a smal number of active owners, with close contact with the founder or the top manager. The founder, as the initial organizational architect is a crucial carrier of internal knowledge of the firm, and have considerable investments, both material and non-material in the firm, and thus, an interest in further success. Hence, the shareholders may not see the need for board members that are independent of the owners, quite the contrary; we would expect the board to be smal and having few independent directors. This will secure close control ease the monitoring of the management. On the other hand, the role of external directors is directly related to the second principle in the codes of practice mentioned above, expertise requirements of the boards of directors, as well as their wil ingness to spend time and effort on board work. According to the resource dependence perspective on corporate governance, an important function of a board is to provide the company with resources . And in young, high-growth firms, the role of the board in providing important advice and access to resources is considered to be particularly important , because small and young firms often suffer from scarcity of internal resources and competence on different areas of expertise. Thus, the board may represent human and social capital that may not yet be available internally within the firm . Rosenstein et al. (1993) also underscored the directors’ service role. In a study of high technology firms receiving venture capital backing, they found that CEOs valued outside board members, particularly during the early developmental stages of their firms. These CEOs especially appreciated the outside directors’ information and expertise. Interestingly, CEOs reported that they tended to value outside directors less over time. There are a number of types of resources and expertise that have been addressed in the literature, such as building relationships to external stakeholders, facilitating access to capital, strengthening legitimation in the market, and expertise on the firms’ strategic and operational activities . The specific resources that have been subject to research are, however, scarcely mentioned in corporate governance codes, except the general recommendation of sufficient expertise and time and effort provided by the directors. These are related to the strategy and service roles of a board, roles that are mentioned in the codes. Empirical findings show support for the resource dependence theory, for example, firms with strong human capital on the board have been found to have better subsequent performance, higher pricing at initial public offering, and increased credibility and legitimacy in the market . We would thus expect that the boards in high-growth firms would be small, be mainly composed by direct owners, but may also have external directors, depending on their strategy and internal resources available. Regarding the recommendation of time and effort provided by the board members, Vafeas found that frequency of board meetings increased following a decline in share prices, and that performance increased following this period of abnormal board activity. We believe that small boards are easier to coordinate and easier to assemble, and few owners with high- risk stakes would be likely to keep better control through frequent meetings. The role of executive personnel – the founder
The third principle in the codes of practice, the roles of the CEO and other executive personnel, has also been subject to extensive research. The Norwegian rule that the CEO cannot be a member of the board is not common in other countries, and much research has been conducted on the effects of what is labeled CEO duality – i.e. the CEO is also chairing the board. This research is based predominantly in the agency perspective, where it is believed that a board with a powerful CEO will be less able to perform the control role and hence the firm will have weaker corporate governance. However, the empirical findings are inconsistent on this issue. Dalton et al. in their review found no relationships between board leadership structure (CEO duality or not) and financial performance. Pearce and Zahra found that participative boards with high board power and high CEO power, outperformed boards with weaker boards. Thus, the CEO role duality has been labeled a “double-edged sword” , in that while it may reduce the control function of the board, it wil enhance unity of command. In the high-growth stage of a firm’s life cycle, the founder is most likely central in the firm’s operations as a manager or a director on the board. Labeling a firm in the high-growth phase a “threshold firm”, Daily and Dalton discuss this phase as a transition from an entrepreneurial to a professionally managed firm, during which the entrepreneur is supposed to yield control of operations to professional managers. Theorizing on this transition process, Gedajlovic asserts that founder-managed firms tend to reach a knowledge and resource crisis, where founders should cede control to professional managers. It is suggested, however, that founders tend to be possessive of their property rights, and are reluctant to share control. Thus, founder-managed firms may be incapable of successfully negotiating the transition to a professionally managed firm . In line with the theory of the “threshold firm” , we argue that probably the most crucial question regarding executive personnel’s roles in the corporate governance structure of a high-growth firm is the role of the founder. The founder may have a position in the top management of the firm, may be a director on the board, be a substantial owner, or have all three or none of these roles. At a certain point of time in the life cycle of the firm, the shareholders will probably want to exert more control through appointing a new, professional CEO. However, what roles the founder should occupy in the firm’s further life is not a clear-cut issue. There may be many advantages of having a founder with a strong position in the high-growth firm. For example, the dual role of the founder-director may decrease the cognitive heterogeneity of the board and contribute to aligning conflicting views in strategic decision making. Founder-directors can drive director selection processes because of their greater influence in the board, and secure that crucial expertise not available internally is acquired . Founders are often the embodiment of the firm’s culture, and they typically possess unique networks and have exclusive knowledge about the firm . In founding a firm, founders typically develop the firm’s strategy, and they often continue to have strong psychological attachment and involvement over time . Further, active founders are the longest-serving members of the organization, and their presence on the board may lead to increased strength within the board’s col ective mindset As mentioned earlier, in young SMEs, the founder and owners will have interests that are more aligned than those of larger, public firms. The likelihood that founder-managers will misuse shareholders’ trust is smaller because of these firms’ small size and resource base . The founder also typically owns a significant share of the firm. Aligning the interests of the founder- manager with those of the board members further reduces the possibility that the board will challenge the growth focus of the firm. Consistent with this line of reasoning, Brunninge et al. find that closely held SMEs typically face less pressure from outside investors to engage in strategic change than their larger counterparts do. Further, Hambrick and Crozier find that founders can help growing firms overcome challenges that arise in that stage of the firm's life cycle. Having founders on the board ensures that the culture of the firm is preserved and provides goal clarity for the entire organization. Furthermore, founders typically prefer flat structures and ensure that management stays "close to the action". Thus, while there are no clear solutions to the question of the founder’s role, the characteristics of the high-growth firm suggest that the founder may have an important role to play in the strategy of the firm, however, the challenges of power delegation and power sharing should be addressed in a governance structure of these firms. While theorists of the threshold firm argue that the founder should at one point of time be replaced by professional managers , there is empirical evidence suggesting that founder-managed firms consistently perform better than professionally managed firms. For example, Fahlenbrach found that founder-CEO firms had higher valuation, better stock market performance, and more actively pursued active growth strategies than did professionally managed firms. Villalonga and Amit found that Fortune 500 family firms had higher valuation if they had active involvement by the founder, either as a CEO or as a chairperson of the board. The above discussion shows that there are no straightforward answers to what constitutes an effective governance system in high-growth firms. In the fol owing, we present an empirical analysis of the high-growth firms in Norway, focusing on their characteristics as well as how they have solved Methodology
The leading Norwegian business newspaper, Dagens Næringsliv (DN), publishes a list of high-growth firms (labeled gazelles) each year, and their list, as published in 2010, 2011, and 2012, provides the population for our data set. If a company is on the list once (or more) during these three years, it is included in the population. To be defined as a high-growth firm, six requirements must be fulfilled: The firm must have completed approved accounts. At least doubled their revenue during the previous four years. Earned revenues of at least one million NOK (137000 EUR). Is incorporated (i.e., is registered as a corporation or limited liability company). If a company fulfills all six criteria, it is considered a gazelle; otherwise, it is considered a "regular" company. Criterion 2 requires that the companies in our sample are at least five years old. By applying all six criteria, we were able to obtain a sample of firms with a stable pattern of high growth A questionnaire was administered to the CEO of each company. A total of 2116 gazelles were identified for 2012, 1996 for 2011, and 2579 for 2010. The interviews conducted were computer assisted telephone interviews (CATI). The questionnaire was originally written in English and was then translated to Norwegian. A total of 1000 responses were obtained from the gazelles, including 459 responses from the 2012 list (a response rate of 21.7 percent), 268 responses from the 2011 list, and 273 responses from the 2010 list. To correct for possible selection bias caused by non- respondents, the sample was compared to the population of gazelles on basis of the number of employees. A mean comparison test showed no significant differences between the groups (p<0.05). In addition, a comparison group for the analysis was randomly sampled from the total population of Norwegian SMEs to compare the high-growth firms in our sample of analysis with the general population of Norwegian SMEs. This step yielded 501 responses. No publicly listed companies were included in our sample. There are several international definitions of SMEs. We fol owed the definition used by the EU and defined SMEs as companies with fewer than 250 employees. Furthermore, we excluded acquisition growers, as recommended by Mckelvie and Wiklund , such that only organical y grown companies were included in the sample. Companies with no board members were also excluded from the sample. The final sample consists of 1261 respondents, 865 high growth firms and 396 SMEs in the comparison group. Based on earlier literature on high-growth firms, and the principles of corporate governance, we selected a set of variables that wil give us indications not only of the governance structures of the high-growth firms, but also data on some crucial characteristics of these firms. In order to obtain an understanding of the high growth firms in the sample, a number of descriptive variables are listed in table 2: Foundation year, number of employees, growth intentions, revenue growth, access to capital resources and access to labor resources. A two-item, seven-point Likert-type scale (1 = completely disagree, 7 = completely agree) was used to measure growth intentions. The two items used were adopted from the scale developed by Kolvereid ; they indicate whether the company intends to grow in terms of revenue and number of employees during the upcoming five years. The scale showed satisfactory reliability, with a Cronbach’s alpha of 0.75. Revenue growth was measured by subtracting the revenue in 2010 from the revenue in 2007. Access to capital and access to labor are measured on a seven-point Likert-type scale through two single items indicating if the companies experience problems in attracting qualified personnel and capital. Thus, the higher score on this variable the less access to personnel and capital. Independent directors were defined as board members who are neither owners nor employees of the company. To capture the effect of independent directors, we measured the number of independent directors on the board and used the share of independent directors. In order to capture the roles of the founder, we apply three dummy variables. The first is a measure of the founder also being a member of the board (founder-director). The second indicates if the founder is a part of the top management team (founder-manager). The third measures whether the founder is an owner of the company (founder-owner). Combining these three dummy variables provide eight groups of founder role possibilities. The groups are shown in figure 1. Gender diversity was measured as the number of women on the boards relative to the total members, computed as the percentage of women. Characteristics of high-growth firms. Table 1 shows the distribution of type of industry and location of both subsamples. Insert Table 1 about here
The table shows a fairly similar distribution between the two samples, both for geographical location and for type of industry. Thus, it appears that no industry or geographical location is particularly are more beneficial than others for high-growth firms. In the literature, high-growth firms are frequently categorized as young and small. As we are only including SMEs in our sample, no large firms are included. Still, Table 2 shows that the high-growth companies are generally half the age of the average SME firm in Norway. An independent samples T- test revealed that both age, size and growth intentions were significantly different between the two groups of firms. Thus, consistent with earlier findings from other countries, Norwegian high-growth Insert Table 2 about here
It is also interesting to note that the standard deviation of the age variable in the comparison group of firms is double as high as in the group of high-growth firms. Thus, high-growth firms have less variation in age than the general population of firm, which is consistent with the life cycle perspective. Regarding size, measured as number of employees, the differences are smaller, but the mean size of an SME in Norway is still 30% larger than the average high-growth firm. Similar to the results for age, there is considerably more variation in size between the general SME population of firms than between high-growth firms. These results, together with the careful selection criteria for our sample of high-growth firms, confirm that these firms are special – they are significantly different on several criteria – the most central, of course, being previous growth, and future growth intentions. We also ran a correlation analysis on future growth intentions and age, and the younger firms have significantly higher growth intentions than the older ones. From table 2, we also observe a difference in access to labor, indicating that the high growth firms find it harder to recruit qualified persons. Since the high growth firms also have high growth intentions and thereby plan to hire new persons, the results indicate that the problem in attracting qualified labor is more relevant for the Characteristics of governance structure Table 3 shows the corporate governance structure characteristics that we included in the study. Insert Table 3 about here
The results show that high-growth firms have a greater number of owners that the general population of SMEs. The difference is not large, but it is significant. However, there are few owners in both groups of firms. The larger number of owners in high-growth firms may indicate that firms in the high-growth stage need investors, and as the firms in our sample has grown rapidly the last years, it indicates that the entrepreneur has been successful in the efforts to find additional investors. This is also reflected in the size of the board, as it is significantly larger in high-growth firms The table also shows that the proportion of independent directors on the boards is on average 26% in the high-growth firms, not significantly different from the comparison groups. This indicates that the high-growth firms have succeeded in acquiring investment capital, that the owners are directly represented on the board, and that the boards have on average one independent director out of four in total, which is a substantial proportion. The proportion of women on the boards is 21 %. This is 2 % less than in the comparison group, but the difference is not significant. However, the average proportion of women on the total limited liability firms in Norway is 17 %, so it appears that high-growth firms have more gender diversity on their boards. Regarding the roles of the founder, Table 3 shows large and significant differences between high- growth firms and other SMEs, on all three types of role combinations. The founder has 30 % larger probability of being also a top manager or a director than in the SME group of firms. In Figure 1, we show a more detailed analysis of the founder roles. We see that the far most common position for the founder in high-growth firms is to have a role triality- i.e. being owner, board member and top leader simultaneously. 81.4 % of the companies have a founder occupying al three roles, while in the comparison group, 56.6 % of the companies have founder role triality. Discussion
One of the main purposes of corporate governance is to protect shareholders rights, and confidence in a country’s ability to protect investments is a prerequisite for a healthy economy. Publicly traded companies, for whom the governance codes primarily apply, mostly have many shareholders, and the composition of the board of directors is intended to contribute to balancing their interests and power. From Table 3 in our analysis, we see that on average, high-growth firms (and SMEs as well) have one more person on the board than the number of owners. This shows that al the shareholders have a direct representation on the board, which should secure the protection of their rights, without any arrangements or rules regarding the composition of the board. Further, the low number of owners may ease coordination and transparency between owners, provided there are few conflicts of interests. Our results show that the high-growth firms have more owners than the average SME, however. We interpret this as an indication that a strategic focus on growth requires increased investments, and thus recruitment of additional financers. As the high-growth firms in our sample have succeeded in obtaining fast growth the previous years, they have obviously succeeded Our data show that board independence may be a different issue in high-growth firms than in publicly traded companies, as indicated by the governance structure. First, the principle that the board should function as a collective that does not favor any single owners is somewhat irrelevant as al the owners are represented on the board. However, one fourth of the board members in the high- growth firms are independent, i.e. neither owners nor executive personnel. For the majority of the firms, this equals one out of four board members. As a single person, independent director hardly would have sufficient power or authority to balance any conflicts of interests or power issues between the owners on the board, and we consequently interpret the role of this independent director as being an extra resource – i.e. having been recruited for expertise. Thus, we may conclude that a strategy for growth is consistent with a smal group of owners (although large enough to secure investments) that are active on the board, supplied with external expertise that is scarce The other aspect of the independence principle, the independence of the executive personnel vis-à- vis the board, appears neither to be relevant in high-growth firms. An overwhelming majority of the founders in the high-growth firms are owners, directors, and members of the top management team simultaneously – we label this role triality. First, this is an indication of support to the assumption that founders and managers in young firms have interests that are aligned with those of the firm owners . These common interests may also play an important role in the firms’ ability to pursue a persistent growth strategy. Second, it is an indication of a resource dependence argument for board composition in these firms. The founder has unique competence, and as an owner probably strong interests in further growth, and consequently plays a crucial role in offering both knowledge and efforts towards the growth strategy. And – contrary to what is predicted in the theory of the threshold firm , an overwhelming majority of the high-growth firms have the founder in top managerial positions. It could be argued that this is because the threshold stage is not yet reached. However, these firms are well beyond the entrepreneurial stages, both in age and size, and our findings raise the question as to when it would be preferable to replace the entrepreneur. As we have shown earlier in the paper, there are empirical results indicating that the answer to this question could be “never” So, what are the implications of our findings? We should be careful to draw any firm conclusions as to what kinds of governance structures that may contribute to high growth, as our research design does not allow for causal inferences. However, we see some clear patterns in the data that fits well with existing theory and research that may contribute to further theory building on corporate governance in SMEs in general and for strategies for growth in particular. One of the most prominent theories of corporate governance, agency theory, is based on the assumption that separation of ownership and management in a company creates conflicts of interest, and, hence, a need for monitoring of executives by the owners. It appears that young firms that have succeeded in growing fast do not have this conflict of interest, because they have not total y separated ownership and management. On the contrary, the founders’ role triality is an indication that ownership and management is closely tied together, and supplemented with some external expertise. If a company is able to minimize this fundamental conflict of interests over quite a long period of time (the average age of the high-growth firms in our sample is 15 year), it allows for a governance structure that strengthen the unity of command and enables the firm to pursue a growth strategy. However, it is worth noting that despite this unity, the high-growth firms do have independent directors on the board, and they have larger gender diversity than the average Norwegian limited liability company. Thus, a strong core of owners and managers, together with a focused strategy, is combined with diversity and inclusion of external expertise, which may reduce the propensity for narrow-mindedness in the leadership of the company. References
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