The sample consisted of 14 board members of closely-held, newer firms. In order to obtain the perspective of both inside and outside board members, seven of the interviewees wereentrepreneurial CEOs, three were private investors, three were venture capitalists, and one was an outside expert. Interviewees were recruited through business directories or personal contact and served on boards of firms in the high-tech, service, transportation, and manufacturing industries. All firms had outside investors on the board. Some investors were members of venture capital firms whereas others were private investors.
Interviews, lasting about 1 to 1/2 hours, were conducted by two of the investigators using a semi-structured interview schedule. This schedule addressed interviewees' general experiences with board meetings and specific experiences within one meeting. The schedule was developed based on a preliminary review of the literature relating to boards, agency theory and justice theory. As a result of this review, we focused on the following key areas: board structure and function, issues addressed during board meetings, information exchange and decision making during board meetings, and communication outside of board meetings.
Content analysis of the interviews revealed several trends. Many respondents felt that stage played a role in the structure of boards, with committees becoming more prevalent in later stages and "marquis players" being added when the venture was preparing for IPO. Board meetings generally consisted of review of past performance, planning and goal setting, and decision making. We observed considerable variation in the relative emphasis on these three activities; the variation appeared to be associated with venture stage and performance. The issues cited most as most controversial were compensation, personnel, and valuation decisions. Surprisingly, much of the conflict reported on these issues was between investors rather than between insiders and outsiders. We found that much of the major decision making activity was conducted outside of board meetings, particularly when decisions involved controversial issues. Investors and CEOs expressed different views regarding information exchange and decision control. Most CEOs were satisfied with the quality of information they provided for board meetings. In contrast, investors often felt that board packet information did not include the appropriate comparisons and explanations.
Three central themes emerged from the interviews: goal heterogeneity (or conflict), information exchange, and decision control. First, goal heterogeneity is a salient reality to many board members. Both insiders and outsiders voiced concerns over conflict of interest as a disruptive force in the decision-making process. In many cases, conflict emerged more over means to achieve goals rather than the ends. Second, information exchange was recognized by respondents as a central aspect of both insiders' and outsiders' role on the board. Respondents indicated that management's role was to provide full and accurate disclosure of information whereas outsider members' role was one of oversight. While respondents representing both perspectives largely agreed on these roles, there was less agreement on how well information was shared and what information was most important. Lastly, decision control was an issue, particularly from the perspective of insiders. One common view was that outsiders should provide input on strategic issues and not become involved in operational decisions. A related concern was the control of the board meeting itself, particularly as it related to discussion of strategic versus operational issues. Both insiders and outsiders noted instances of board member factions and "dissident" members who attempted to resist or force issues.
Agency Theory and Board Processes
The agency relationship is defined by Jensen and Meckling (1976: 308) as "a contract under which one or more persons (the principal(s)) engage another person (the agent) to perform some service on their behalf which involves delegating some decision making authority to the agent." Though researchers have generally treated outside owners as principals and managers (or entrepreneurs) as agents (Sapienza & Gupta, 1994), it is clear that both sides serve as agents at times (Fiet, 1991; Sapienza & Korsgaard, 1996). The principal faces two agency risks in delegating decision-making authority: the risk that the agent will not act as desired (moral hazard or opportunism) and the risk that the agent will not be "up to" the task (adverse selection). It is often presumed that one of the functions of an "independent" board is to ascertain whether venture failings are attributable to management opportunism, management incompetence, or outside conditions beyond management control (Walsh & Seward, 1990).
Two underlying assumptions of agency theory are those of self-interest and bounded rationality. That is, individuals are motivated to maximize their own utility and rationally calculate the means of such maximization up to the limits of their knowledge and capacities. Thus, the more the goals of investors and entrepreneurs diverge (i.e., the greater the goal conflict), the more likely the entrepreneur will take actions not in the interests of investors. The separation of ownership and control has often been depicted as the primary source of goal conflict in manager-outsider relations (Jensen & Meckling, 1976). That is, the less a manager owns of the venture, the greater the incentive to consume venture resources for which he/she pays only a partial share. However, given the large stake founder-entrepreneurs and other top managers have in a closely-held venture, the power of this motive in this context has been questioned (e.g., Sapienza & Gupta, 1994). Although agency theory assumes that all decision makers are risk averse, it would see entrepreneurs' limited ability to diversify the risk of business failure as causing them to be more (business) risk averse than investors (Eisenhardt, 1989). Thus, differences in incentives and business risk preferences are among the two most commonly cited sources of goal conflict between inside and outside board members. Such problems are made especially difficult to control as information asymmetry is high. When information is very complex, technical, or proprietary it may be especially difficult for the principal to monitor and assess agents' actions (Sapienza & Gupta, 1994). Under such conditions one may readily see how adverse selection and opportunism may pose significant risks.
In theory, the board may be structured so as to attenuate some of these problems. Generally speaking, agency theorists have recommended the following to stem opportunism: 1) make the chairman of the board someone other than the CEO, preferably an outsider; 2) make the board "independent" of the CEO by including a high percentage of outsiders, especially outsiders not indebted in any way to the CEO; 3) involve the board in strategic direction and key selection decisions (Huse, 1994; Pearce & Zahra, 1991). In a broad sense, this structuring puts the board in a position to direct board decisions to be in line with the interests of ownership and to monitor venture decisions. Such boards can use its power to hire, fire, and compensate managers and, thus, shape the direction of the venture. However, a delicate balance is implied in the origins of the theory, for the benefits of separation of ownership and control may be lost if the board attempts to make decisions best made by those closest to the action. As yet, little is known about how board processes may create or undermine such balance.
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