Board Leadership and Strategy Involvement in Small Firms: A Team Production Approach

• Published date: 01 July 2011
• Author: Silke Machold,Alessandro Minichilli,Morten Huse,Mattias Nordqvist
• DOI: http://doi.org/10.1111/j.1467-8683.2011.00852.x
• Date: 01 July 2011

Board Leadership and Strategy Involvement in

Small Firms: A Team Production Approach

Silke Machold*, Morten Huse, Alessandro Minichilli, and

Mattias Nordqvist

ABSTRACT

Manuscript Type: Empirical

Research Question/Issue: Boards’ involvement in strategy is generally seen to be an indicator of board effectiveness, but

less is known about the relationship between board leadership and strategy involvement, especially in small f‌irms. This

study analyzes board leadership from a team production perspective as an antecedent to board strategy involvement in

small f‌irms.

Research Findings/Insights: Using survey data from 140 small f‌irms in Norway collected in two different time periods, we

demonstrate that leadership behaviors and processes have a greater impact on boards’ strategy involvement than structural

leadership characteristics alone.

Theoretical/Academic Implications: The study provides empirical support for a team production perspective on boards.

Our data show that (1) board members’ knowledge, board development, and board chairperson leadership eff‌icacy

positively inf‌luence boards’ strategy involvement, and (2) chairperson leadership eff‌icacy enhances boards’ strategy

involvement under structural conditions of combined CEO/chairperson leadership and changes in board composition.

These f‌indings expand the traditional understanding of structural leadership conditions.

Practitioner/Policy Implications: The study offers insights to small business owners and managers on how to improve the

strategy involvement of boards. For policy makers, the study has implications for the content of codes of good governance

practice relevant to small f‌irms, specif‌ically in relation to board development initiatives and board evaluations.

Keywords: Corporate Governance, Board Leadership, Small Firms, Team Production Theory

INTRODUCTION

Most research on corporate governance and boards has

focused theoretically and empirically on large corpo-

rations (Daily,Dalton, & Cannella, 2003; Gabrielsson & Huse,

2004). While research in small f‌irms has grown substantially,

relatively limited attention has thus far been paid to their

boards and governance structures (Fiegener, 2005; Fiegener,

Brown, Dreux, & Dennis, 2000a, 2000b; Gabrielsson &

Winlund, 2000). There is, however, an emerging consensus

that boards in small f‌irms may constitute an important orga-

nizational asset (Certo, Covin, Daily, & Dalton, 2001; Gabri-

elsson, 2007), that boards can add an important strategic

dimension to small f‌irms (Brunninge, Nordqvist, &

Wiklund, 2007; Fiegener, 2005; Zahra, Filatotchev, & Wright,

2009) and that small f‌irm board and governance structures

can inf‌luence f‌irm value creation (Certo, Daily, & Dalton,

2001; Huse, 2000).

Extant research identif‌ies both differences and similarities

in corporate governanceand boards in large and small f‌irms.

In large corporations, assumptions about separation of own-

ership and control along with divergent utilities of manag-

ers and shareholders sharpened the focus of research and

governance practice on the monitoring and control role of

boards (Daily et al., 2003; Jensen & Meckling, 1976; Zattoni &

Cuomo, 2010). While agency problems are also relevant to

the small f‌irm context, decision-making and control struc-

tures here are less complex and diffuse compared to large

f‌irms resulting in a comparatively diminished boards’ moni-

toring role (Daily & Dalton, 1993; Fama & Jensen, 1983). The

type and content of boards’ service and strategy tasks also

vary between small and large f‌irms (Zahra & Pearce, 1989),

and at different stages of small f‌irms’ life cycles (Lynall,

Golden, & Hillman, 2003). Finally, the impact of founders

*Address for correspondence: Silke Machold, Management Research Centre, Univer-

sity of WolverhamptonBusiness School, MN Building, Nursery Street, Wolverhamp-

ton WV1 1AD, UK. E-mail: s.machold@wlv.ac.uk

Note: All authors contributed equally – corresponding author listed f‌irst.

368

Corporate Governance: An International Review, 2011, 19(4): 368–383

© 2011 Blackwell Publishing Ltd

doi:10.1111/j.1467-8683.2011.00852.x

and/or key entrepreneurs on boards and governance may

be greater in small f‌irms compared to large ones (Arthurs,

Busenitz, Hoskisson, & Johnson, 2009; Nelson, 2003).

Recently, scholars have explored what makes boards active

and effective in task performance, including research on the

range of tasks boards perform (Pugliese, Bezemer, Zattoni,

Huse, Van Den Bosch, & Volberda, 2009; Van den Heuvel,

Van Gils & Voordeckers,2005). In trying to answer questions

about the determinants of board effectiveness, researchers

have increasingly paid attention to board team processes and

behaviors rather than structural characteristics of boards

alone (Finkelstein & Mooney,2003; Forbes & Milliken, 1999),

using direct observations and/or primary data rather than

relying on traditional archival methods.

Focusing on board team processes, we investigate the

effects of board leadership in small f‌irms on board strategy

involvement. Only a few studies have examined the role of

board leadership in small f‌irms and these tended to explore

the antecedents and performance outcomes of structural

leadership characteristics such as CEO duality (Daily &

Dalton,1992, 1993; Daily,McDougall, Covin, & Dalton, 2002).

Our study extends that body of knowledge by drawing on a

team production approach as a novel theoretical perspective

to investigate board leadership processes in small f‌irms. By

focusing on how leadership relates to small f‌irm boards’

strategy involvement, this paper also aims to respond to calls

for more theoretical and empirical research on determinants

of strategy involvement (Fiegener, 2005; Kim, Burns, & Pres-

cott, 2009).

The article is structured as follows. Following a brief intro-

duction to the literature on board strategy involvement in

small f‌irms, we outline our theoretical approach and derive

hypotheses. We then discuss the methods used including

our sample, variable measurements, data collection, and

analysis methods. Following the presentation of our results,

we discuss their implications for research and practice

before concluding with areas for further research.

THEORETICAL BACKGROUND

Board Strategy Involvement in Small Firms

Research on boards’involvement in strategy has been prolif‌ic

(Golden & Zajac, 2001; Judge & Zeithaml, 1992; McNulty &

Pettigrew,1999; Pugliese et al., 2009) for a number of reasons.

First, boards’ involvement in strategy is increasingly viewed

as a core contribution to f‌irms’ value creation processes

(Demb & Neubauer, 1992; Judge & Zeithaml, 1992; Pugliese

et al., 2009) despite some evidence to the contrary (Hitt,

Harrison, & Ireland,2001). Hence, research into boards’ strat-

egy involvement has been motivated by the need to under-

stand the links between board and f‌irm performance

(Baysinger& Hoskisson, 1990; Westphal & Fredrickson, 2001;

Zahra & Pearce, 1989).A second and related reason is that the

debate on active versus passiveboards has coalesced around

boards’ strategyinvolvement as a key differentiator between

these (Castro, de la Concha, Gravel, & Perinan, 2009; Petti-

grew, 1992; Rindova, 1999). McNulty and Pettigrew (1999),

for example, argue that an active board does not just ratify

and control strategy, it is also involved in formulatingstrate-

gic decisions as well as def‌ining and shaping which decisions

are to be taken in particular contexts. Thus, boards’ strategy

involvement may be seen as a key indicator of board perfor-

mance and effectiveness (Stiles, 2001). Third,boards’ strategy

involvement is a complex multi-dimensional construct and

has been approachedfrom a range of theoretical perspectives

(Carpenter & Westphal, 2001; Pugliese et al., 2009). This

theoretical pluralism has presented both opportunities and

challenges for empirical research and the practical implica-

tions derived from it (Pugliese et al., 2009).

Despite the impressive advancements in knowledge in

boards’ strategy involvement, some unanswered questions

remain. Not only is the empirical evidence on boards’ strat-

egy involvement inconclusive, there is a lack of empirical

studies investigating the phenomenon in contexts other than

large Anglo-American boards. Some notable exceptions not-

withstanding (Fiegener, 2005; Gabrielsson & Winlund, 2000;

Judge & Zeithaml, 1992), we lack knowledge on antecedents

of boards’ strategy involvement in small f‌irms. Entrepre-

neurship and small business scholars have long called for

research not only on the content but also the process of

strategic decision-making in small f‌irms (Dess, Lumpkin, &

McGee, 1999; Sandberg, 1992). Further, the role of teams and

leadership in strategic decision-making processes in small

f‌irms is not yet fully understood (West, 2007). This paper

builds on team production approach to boards and gover-

nance (Blair & Stout, 1999; Kaufman & Englander, 2005) to

address these gaps.

Board Dynamics in Small Firms: A Team

Production Approach

Small f‌irms are often characterized by concentrated owner-

ship, and the appropriateness of agency theory as a theoreti-

cal lens in such contexts has been questioned (Schulze,

Lubatkin, & Dino, 2003; Uhlaner, Floren, & Geerlings, 2007).

When relaxing assumptions about managerial opportunism

and the separation of ownership and control, we need alter-

native theoretical perspectives to explain governance phe-

nomena and board behaviors (Roberts, McNulty, & Stiles,

2005). One such alternative is the team production theory of

the f‌irm (Blair & Stout, 1999; Kaufman & Englander, 2005).

The seeds of team production theory sprang from microeco-

nomics when Alchian and Demsetz sought to explain coop-

erative behavior of individuals in work teams vis-a-vis

opportunism and shirking, and the emergence of hierarchies

in response to team production problems (Alchian &

Demsetz, 1972; Blair & Stout, 1999). While the micro-

economists provided the basic tenets, it was the later contri-

butions from other disciplines, including law and sociology,

that f‌leshed out team production theory (Blair & Stout, 1999;

Blair, 2005). In the contemporary team production perspec-

tive, f‌irms are conceptualized as a nexus of team-specif‌ic

assets, invested by shareholders, board members, managers,

employees, and other stakeholders who hope to prof‌it from

team production (Blair & Stout, 1999; Gabrielsson, Huse, &

Minichilli, 2007; Kaufman & Englander, 2005).As such, team

production theory has resonance with resource-dependency

theory and a stakeholder perspective, but resolves the deci-

sion making and rent allocation ambiguities inherent in these

theoretical approachesby introducing the concept of a medi-

BOARD LEADERSHIP AND TEAM PRODUCTION IN SMALL FIRMS 369

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