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Article

The Governance Roles of Private Equity  

Sophie Manigart, Miguel Meuleman, and Tom Beernaert

Private equity (PE) investors enhance the governance of portfolio companies by installing high-powered boards, structuring the senior management team, installing reward and performance management systems, and advising the portfolio company. The aim is to reduce agency risks and to increase shareholder value. A growing body of literature investigates the real effects of PE buyouts on their portfolio companies. Empirical evidence suggest that PE buyouts do not consider efficiency improvements as their main value-creating strategy, but PE enhances growth rather than efficiency. Researchers’ understanding of PE’s entrepreneurial growth approach to increase shareholder value is limited to date, although it is known that PE portfolio companies are active innovators and that PE portfolio companies extensively engage in acquisitive growth. Financial performance of PE investors can also be driven by transferring value from other stakeholders to the portfolio company after buyout. Does PE buyout’s shareholder value creation come at the expense of other stakeholders, such as employees or customers, or do they also benefit? PE’s impact on employment and wages in portfolio companies has received considerable attention. The effect depends on the institutional setting and macroeconomic conditions and differs across PE groups and by type of buyout. PE buyouts do improve employees’ safety, well-being, and human capital. Research on the impact of PE on stakeholders other than employees is limited. Industry-specific studies uncovered fine-grained actions and mainly negative effects on various stakeholders beyond shareholders and employees. This highlights the tension between enhancing shareholder value at the expense of stakeholder value. Given the continuous development of practices in the PE industry, the governance roles of PE will remain a fertile ground for academic research.

Article

Familization of Lone-Founder Firms: Highlights from Asian Firms  

Yijie Min, Yanlong Zhang, and Sun Hyun Park

Family firms can either be “born” or “made.” Although previous studies suggest that most of the family firms in the US context are “born,” family firms can be “made” by the founder’s decision to invite family members to the management. We conceptualize this process of family firm emergence as familization, during which lone-founders’ family influence increases as more family members are appointed to director and/or executive positions. Transition from lone-founder-control to family-control is often accompanied by significant changes in governance structure, strategic decisions, and firm performance. This work documents the pervasiveness and heterogeneity of the familization process and proposes an analytical framework covering four research areas associated with the phenomenon: the antecedents that motivate founders to choose the familization path, the familization process involving internal and external firm constituents, the consequences of familization decision, and the potential moderators of the familization impact. To better understand these theoretical perspectives, an explorative empirical investigation is conducted based on a sample of Chinese-listed firms that experienced familization. Familization cases in other Asian emerging economies were also discussed in comparison with the family firms in Western economies.

Article

Corporate Governance in Entrepreneurial Firms  

Julio De Castro, Jose Lejarraga, and Qiong Wu

Corporate governance unfolds in entrepreneurial firms, giving rise to concerns about the coordination and control of resources. Understanding corporate governance in entrepreneurial firms (CGEF) is important because of the challenges of liability of newness and smallness and issues of transition. In particular, two issues affect these firms: a diluted separation between ownership and control and the role played by boards of directors. As a result, most of the literature on CGEF revolves around the interrelations between these governance mechanisms and how they affect the outcomes of entrepreneurially driven firms. This combination of factors present in entrepreneurial firms gives rise to new theoretical perspectives that enrich the corporate governance literature.

Article

External Corporate Governance Mechanisms: Linking Forces to Behaviors  

G. Tyge Payne and Curt Moore

Corporate governance research has a long and varied history, having evolved from a broad number of scholarly disciplines, including sociology, law, finance, and management. Across these various disciplines, it is maintained that governance is essential to corporate success, as it provides strategic and ethical guidance to the company. While research has largely focused on internal mechanisms through which governance is enacted (such as ownership arrangements, board structures, managerial rewards and incentives, etc.), external forces and mechanisms are increasingly important to modern businesses. External corporate governance mechanisms emanate from outside the organization and support forces that promote governance structures, processes, and practices by top executives and board directors. Institutions, industries, markets, networks, and strong individual external stakeholders all work to influence corporate governance decisions and behaviors both directly and indirectly. The external forces induce mechanisms that influence desirable behaviors or intervene when internal mechanisms are compromised or ineffective. Recent literature on external governance mechanisms can help scholars and practitioners develop a better understanding of this important area of inquiry, and future research should consider three broad suggestions to move the field forward: differentiating between forces and mechanisms; recognizing unique stakeholders, boundaries, and levels of analysis; and improving empirical designs to better recognize and understand what factors matter in instituting governance adjustments and behavior changes.

Article

Corporate Governance in Business and Management  

Erik E. Lehmann

Corporate governance is a recent concept that encompasses the costs caused by managerial misbehavior. It is concerned with how organizations in general, and corporations in particular, produce value and how that value is distributed among the members of the corporation, its stakeholders. The interrelation of value production and value distribution links the ubiquitous technological aspect (the production of value) with the moral and ethical dimension (the distribution of value). Corporate governance is concerned with this link in general, but more specifically with the moral and ethical dimensions of distributing the generated value among the stakeholders. Value in firms is created by firm-specific investments, and the motivation and coordination of value-enhancing activities and investment is protected by the power concentrated at the pyramidal top of the organization. In modern companies, it is the CEO and the top management who decide how to create value and how to distribute it among the relevant stakeholders. Due to asymmetric information and the imperfect nature of markets and contracts, adverse selection and moral hazard problems occur, where delegated (selected) managers could act in their own interest at the costs of other relevant stakeholders. Corporate governance can be understood as a two-tailed concept. The first aspect is about identifying the (most) relevant stakeholder(s), separating theory and practice into two different and conflicting streams: the stakeholder value approach and the shareholder value approach. The second aspect of the concept is about providing and analyzing different mechanisms, reducing the costs induced by moral hazard and adverse selection effects, and balancing out the motivation and coordination problems of the relevant stakeholders. Corporate governance is an interdisciplinary concept encompassing academic fields such as finance, economics, accounting, law, taxation, and psychology, among others. As countries differ according to their institutions (i.e., legal and political systems, norms, and rules), firms differ according to their size, age, dominant shareholders, or industries. Thus, concepts in corporate governance differ along these dimensions as well. And while the underlying characteristics vary in time, continuously or as a result of an exogenous shock, concepts in corporate governance are dynamic and static, offering a challenging field of interest for academics, policymakers, and firm managers.