Organizational Transitions and the Consequences of Governance: an Analysis of Start-up and...
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Organizational Transitions and the Consequences of Governance: an Analysis of
Start-up and Adolescent High Technology Ventures
Shaker A. ZahraBabson College
&James C. Hayton
Utah State University
What we know Governance through boards of directors is
important for
…firm performance (Zahra & Pearce, 1989)
…recognizing and acquiring resources (e.g., Shane & Cable, 2002)
…signaling firm capabilities (e.g., Certo et al., 2001)
Little research has been done on the composition, decision making processes and contributions of boards to the performance of new ventures (companies 8 years or younger).
This gap is surprising given that new ventures are important for the growth of national economies and the fact that boards can contribute in meaningful ways to these companies success.
Boards and New Ventures
Boards and New Ventures
Boards can play a major role in determining the success (if not the survival) of new firms. Examples include:
Obtain resources Identify potential sources of capital
Connect firm to external stakeholders Help gain legitimacy Guide the strategy development process Oversee implementation Monitor CEOs who may mix business and personal
goals.
What we don’t know Need to address governance in
emerging ventures.
Need a more dynamic (life-cycle) perspective (e.g., Zahra & Pearce, 1989)
Need to understand impact on innovative performance (e.g., Zahra, Neubaum & Huse, 2000)
In This Study We Use….
Organizational life cycle (OLC) Theory
Tells us that companies face different challenges over time.
Resource Dependence Theory
Helps to delineate the potential contribution of the board over the course of the OLC.
Organizational Life Cycle:Challenges for New
VenturesSTART-UP (Years 1-5)
Legitimacy Access to resources Owner control Centralized Simple & Organic Innovation/
engineering Smaller
ADOLESCENT (Years 6-8)
Growth Product line
expansion Professionalization Role differentiation Formalization Marketing/Admin. Larger
We Focus on Board Composition because
It influences the decision making process on the board.
It also captures the skills directors possess.
Research has yielded contradictory findings regarding the effect of composition variables on performance.
Most existing evidence comes from well established companies.
Most of past research fails to capture the effect of composition at different stages of the OLC
Board Composition Variables We Examine Include
CEO is also chair (duality) Presence of Founder on the board. Size of Top Management Team and Board Representation of Outsiders/Board Venture Capitalists (VCs) on the board. Functional Diversity of Board Members Educational Diversity.
Our Predictions Regarding Changes in Board Composition
Variables
CEO is founder……………………………………… Size of Top Management Team ………………….. Board size……………………………………………. Proportion of Outsiders/Board …………………... Proportion of Venture Capitalists (VCs) on the
board………………………………………………….. Functional Diversity of Board Members………… Educational Diversity of Board Members……….
Start ups vs. Adolescents
><<<
><<
In our Model We Focus on Two Dimensions of
Performance Financial
Determines survival of the ventures.
Source of wealth creation.
Provides slack resources for innovation and expansion
Innovative
Source of product differentiation
Shift from innovation to commercialization as we move from the start up to the adolescent stages.
Our Predictions Regarding Effect of Board Composition On Innovative
Performance
CEO duality Founder(s) on the board. Outsiders/Board VCs on the board. Functional Diversity of Board Educational Diversity.
Start UPs
++++++
Adolescents
n.s.n.s.+
n.s.++
Our Predictions Regarding Effect of Board Composition On Financial
Performance
CEO duality Founder(s) on the board. Outsiders/Board VCs on the board. Functional Diversity of Board Educational Diversity.
Start UPs
++++++
Adolescents
n.s.n.s.+
n.s.++
Method: Sample and Data Collection
Mail survey; 2 mailings. Targeted 1700 companies in 11
industries. 419 responded, for a response rate of
24.6%
Sample attributes:
Company age=4.2, sd=2.8 Employees=29; sd=44.67
Validation
Pre-tested some of the items on a smaller sample of 41.
Collected data from a second group of respondents in the same companies (n=103) and examined inter-rater agreement on key measures
Measures: Independent Variables
CEO is founder (1= if CEO is also founder; 0 otherwise)
CEO Duality (1= CEO is also chair; 0 if not ) Founding team on board (%) Size of top management team (# of VPs and
higher) Size of Board (total #) Outsiders on board (%)= (outsiders/size) * 100 VCs on board (%)= (VC/size)* 100 Functional diversity of board = Blau’s (1977)
index Educational diversity of board= Blau’s (1977)
index
Measures: Dependent Variables
R&D/Sales (%) [from survey and secondary sources]
New Products (# of announcements from Lexis.Nexus; also data provided by managers).
Entrepreneurship (Survey measure, 8 items taken from Danny Miller, 1983)
Return on Assets (ROA) [ from secondary sources]
Return on Equity (ROE) [from secondary sources]
Classification of OLC
Companies 5 years or younger= Start ups: 73% of the sample [n=306].
Older companies = Adolescent: 27% of the sample [n=113].
We used information from the survey to validate this classification.
Findings Regarding Changes in Board Composition Variables
CEO is Founder………………………………………. Size of of Top Management Team………………… Size of Board………………………………………….. Outsiders/Board……………………………………… Venture Capitalists (VCs) on the board…………... Functional Diversity of Board Members…………. Educational Diversity………………………………..
Start ups vs.
Adolescents
> Yes
< Yes
< Yes
< Yes
> n.s.
< Yes
< Yes
New Product
sEntre.R&D
Findings Related to Innovative Performance
CEO Duality Founders on
board Outsiders/
Board VCs/Board Functional
Diversity Educational
Diversity
n/s
+
n/s
+
n/s
+
n/s
+n/sn/s
n/s
+
+
+n/sn/s
n/s
+
n/s
+n/sn/s
+
+
+
+n/sn/s
+
+
n/s
n/sn/sn/s
+
+
?
?
ROA ROE
Findings Related to Financial Performance
CEO Duality Founders on board Outsiders/Board VCs/Board Functional Diversity Educational Diversity
-
+
n/s
n/s
n/s
n/s
-
+
n/s
+
+
n/s
+
n/s
n/s
+
+
n/s
n/s
+
n/s
n/s
+
+
?? ?
Implications for Practice
Board composition should be revised over time to reflect strategic and structural changes
Founders continue to make a positive contribution to innovative and financial performance.
Board diversity has positive influence on innovative and financial performance, even though the effect is not universal.
CEO duality is a double edged sword – positive early but threatens performance as firm develops
Implications for Theory
Our results are consistent with OLC and resource dependence theories. We need to apply both perspectives more
frequently in future research.
Consider different types of entrepreneurial firms and the impact of strategy and context on governance
How do board processes change over the course of a firm’s life cycle?