Chapter Listing | Return to 1997 Topical Index



A recent analysis of the best and worst boards of directors ranked Walt Disney Co. as one of the worst because the board was "too cozy" and had too many insiders (Business Week, Nov. 25, 1996, pp. 82-106). The ranking, based in part on an assessment of the composition, structure and guidelines of the board, prompted Michael Eisner, chairman and chief executive of Walt Disney Co., to complain that modern theory about what constitutes effective governance is off base: " 'I didn't go to business school, so I didn't have the benefit of two years of intensive training in this area...but what I read about what is expected I find quite counterintuitive.' " (Feb. 24, 1997, p. A1), Eisner contended that a board should be judged by how well the company does, not by how the board is structured.

While Eisner's comment may have been motivated by self-interest, his assessment largely reflects the state of scholarship on boards of directors. Very little academic work has been devoted to how venture boards function or should function. What has been done has relied almost exclusively on the same approaches taken to large firm governance. However, these approaches have been limited in what they reveal about how well boards accomplish avowed purposes. In this investigation, we set out to develop a framework to examine the decision processes in boards by integrating a theoretical perspective that addresses structural issues and a perspective that addresses process issues. We feel the resulting framework is a promising step toward understanding what leads to more effective and efficient decision making in boards of new ventures.

We developed a framework by our integration of agency and organizational justice theories and the analysis of in-depth interview data. The general logic of our integrated model is that the interactions between board members functions to build or undermine interpersonal trust. Because trust involves beliefs about an individual's willingness to act in a manner that is mutually beneficial, it mitigates the impact of agency conditions that suggest a threat of opportunism. Thus, through its effect on trust, prior interactions mitigate or exacerbate the impact of agency risks in future decision making.

Applying the integrated model, we developed a series of propositions concerning the specific aspects of the decision-making process. We identified three aspects of board decision making that may influence the effectiveness and efficiency of decision making: the focus of board meeting discussion, the strength of controversy, and the mode of decision making. Our model suggests that each of these aspects is affected by the threat of opportunism, either due to information asymmetry or goal conflict, such that timely, high-quality decisions are more difficult to achieve when these problems exist. Our model further suggests that the extent to which prior decision making was conducted fairly will mitigate the impact of agency risk in these circumstances.

If our propositions hold true, this integrated model may have important practical and theoretical implications. On a theoretical level, the model provides insight into how board members approach risk and how social relationships can facilitate the management of agency risks. However, our perspective goes beyond merely advising board members to trust each other, but specifies what behavior engender trust. On a practical level, this understanding can be quite valuable. As our model suggests, boards may have greater difficulty making decisions as a unit when faced with high agency risks. However, the types of agency risk we noted--for example, goal conflict over valuation--are common and arguably unavoidable at certain points in the life of the venture. Our model provides specific behavioral prescriptions for how to manage relationships so that these risks do not impede the effective functioning of the board.


Barney, J.B., Busenitz, L., Fiet, J. & Moesel, D. (1989). The structure of venture capital governance: An organizational economic analysis of relations between venture capital firms and new ventures. Academy of Management Proceedings, 64-68.

Bies, R.J. & Tyler, T.R. (1993). The "litigation mentality" in organizational: A test of alternative psychological explanations. Organizational Science, 4: 352-366.

Deutsch, M. (1962). Cooperation and trust: Some theoretical notes. In M. R. Jones (Ed.), Nebraska symposium on motivation: 275-317. Lincoln: University of Nebraska Press.

Eisenhardt, K. (1989). Agency theory: An assessment and review. Academy of Management Review, 14, 57-74.

Fiet, J.O. (1991). Venture capital risk assessment: an empirical test comparing business angels and venture capital firms, Academy of Management Proceedings, 73-77.

Giacalone R..A., & Greenberg J. (1997). Antisocial behavior in organizations. Thousand Oaks, CA: Sage.

Gorman, M., & Sahlman, W.A. (1989). What do venture capitalists do? Journal of Business Venturing, 4: 231-238.

Huse, M. (1994). Board-management relations in small firms: The paradox of simultaneous independence and interdependence. Small Business Economics, 6: 55-72.

Jensen, M.C. & Meckling, W.C. (1976). Theory of the firm: Managerial behavior, agency costs and ownership structure. Journal of Financial Economics, 3: 305-360.

Kim, W.C. & Mauborgne, R.A. (1991). Implementing global strategies: The role of procedural justice. Strategic Management Journal, 12: 125-143.

Konovsky, M. A., & Pugh, S. D. (1994). Citizenship behavior and social exchange. Academy of Management Journal, 37: 656-669.

Korsgaard, M.A., Schweiger, D.M. & Sapienza, H.J. (1995). The role of procedural justice in building commitment, attachment, and trust in strategic decision-making teams. Academy of Management Journal, 38, 60-84.

Lind, E.A. (1997). Litigation and claiming in organizations: Antisocial behavior or quest for justice? In R.A. Giacalone & J. Greenberg (Eds). Antisocial behavior in organizations: 150-171. Thousand Oaks, CA: Sage.

Lind, E. A., & Tyler, T. (1988). The social psychology of procedural justice. New York: Plenum.

MacMillan, I.C., Kulow, D., & Khoylian, R. (1989). Venture capitalists' involvement in their investments: Extent and performance. Journal of Business Venturing, 4:27-47.
Mayer, R. C., Davis, J. H., & Schoorman, F. D. (1995). An integrative model of organizational trust. Academy of Management Review, 20: 709-734.

Pearce, J.A. & Zahra, S.A. (1991). The relative power of CEOs and boards of directors: Associations with corporate performance. Strategic Management Journal, 12: 135-153.

Rosenstein, J. (1988). The board and strategy: Venture capital and high technology. Journal of Business Venturing, 3: 159-170.

Sapienza, H. J., & Korsgaard, M. A. (1996). Managing investor relations: The impact of procedural justice in establishing and sustaining investor support. Academy of Management Journal, 39: 544-574.

Sapienza, H.J. & Gupta, A.K. (1994). Impact of agency risks and task uncertainty on venture capitalist-entrepreneur relations. Academy of Management Journal, 37: 1618-1632.

Tyler, T.R., & Bies, R.J. (1990). Beyond formal procedures: The interpersonal context of procedural justice. In J. Carroll (Ed.), Applied social psychology and organizational settings, 77-98. Hillsdale, NJ: L. Erlbaum Associates.

Walsh, J.P. & Seward, J.K. (1990). On the efficiency of internal and external corporate control mechanisms. Academy of Management Review, 15, 421-458.

Top of page | Chapter Listing | Return to 1997 Topical Index