The tsunami of independent directors - how to handle the demand
Mueller, Jens, Dana, Leo Paul, McDonald, Gael and Maier, Sanford 2006, The tsunami of independent directors - how to handle the demand, Journal of Asia entrepreneurship and sustainability, vol. 2, no. 3, pp. 152-167.
Journal of Asia entrepreneurship and sustainability
Place of publication
Good governance is recognized as a fundamental indicator of the success of a company. For a small- midsized company, this is particularly so, as such companies must be able to competitively demonstrate their flexibility in the face of market forces. This flexibility is the primary advantage they hold over larger firms (Dalton, Daily, Ellstrand and Johnson, 1998).
Such companies, however, can find it difficult to attract good directors (Daum and Neff, 2003) and this makes developing improved strategies of governance a challenge. Taylor, Chait and Holland suggest top directors are not attracted to small/ medium companies because "the stakes remain low, the meetings process-driven, the outcomes ambiguous, and the deliberations insular" (Taylor, Chait and Holland, 2001). We suggest that the attraction of quality directors is a uniquely impacting situation for small and mid-size firms, as it is there where additional management resources should be needed most urgently.
Directors on the boards of small-medium sized businesses are often lagging behind directors of large companies in that they are less likely to be independent external directors and are less likely to represent a diversity of attributes (Dalton, Daily, Ellstrand and Johnson, 1998). Arthur Levitt, former United States Securities and Exchange Commission Chair, describes the culture of medium sized business directorships as a "kind of a fraternity of CEOs who serve on one another's boards" (Stainburn, 2005). In addition, evidence suggests directors of small- medium businesses are often insufficiently trained for the role. Uncertain directors may, for example, be unwilling to ask crucial questions of managers before making major decisions. "Board members sometimes are made to feel that asking a thorny question or advancing an alternative opinion is disloyal to the administration" (Taylor, Chait and Holland, 2001).
Small and medium businesses, however, are a growing contributor to the national economies of countries internationally. In New Zealand, small and medium-size firms recording large GDP values, ahead of many large businesses, which makes our investigation into good governance practices of SMEs relevant to suggest areas in which these firms can improve their governance policies and practices.
We have reviewed more than 2,000 directors, executives and investors in New Zealand, making this one of the largest non-government surveys in governance. Supported by 16 large corporate organizations, such as KPMG, Business New Zealand, Simpson Grierson, Brook Asset Management, Porter Novelli, Sheffield and 'Management' Magazine, this work suggests that the current processes through which directors are selected and trained to serve on Boards of small and medium businesses needs to be altered. We are also concerned over the lack of director education and the close involvement of the Chief Executives as members of the Boards. There is a general concern over the lack of director independence and whether directors are effective in their roles.
We are recommending an alternative process for SMEs to select directors, which will hopefully expand the available pool of directors in quantity and quality.
Field of Research
150312 Organisational Planning and Management
Socio Economic Objective
970115 Expanding Knowledge in Commerce, Management, Tourism and Services
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