Firm Founders, Boards, and Misleading Disclosures: An Examination of Relative Power and Control
2009; Pittsburg State University; Volume: 21; Issue: 3 Linguagem: Inglês
ISSN
1045-3695
Autores Tópico(s)Private Equity and Venture Capital
ResumoFounder- and family-managed firms account for a large proportion of America's commercial activity. By one estimate, such companies represent 65% to 80% of all business enterprises (Gersick et al., 1997), including approximately one-third of the Fortune 500 (Anderson et al., 2003). Although founder characteristics such as experience and knowledge have been common topics of investigation (e.g., Barringer et al., 2005; Colombo and Grilli, 2005), many other issues pertaining to the efficiency of the business form remain largely unexplored (Schulze et al., 2001). One question concerning founder-led firms that has not been settled, and one that has begun to resonate with new urgency, concerns the governance and agency cost implications associated with such firms' ownership and control structures (Fama, 1980; Fama and Jensen, 1983a, 1983b; Jensen and Meckling, 1976). On the one hand, agency theory implies that founder-managed firms should minimize the distance between ownership and control, thereby reducing or, perhaps, eliminating agency costs and contributing to efficient governance (Daily and Dollinger, 1992). On the other hand, some evidence is beginning to accumulate suggesting that such firms impose unique costs due in part to the confluence of control and self-interest (e.g., Anderson et al., 2003; Certo et al., 2001; Gomez-Mejia et al., 2001; Ranft and O'Neill, 2001; Schulze et al., 2001; Schulze et al., 2003). This work seeks to improve understanding of the nature of governance and control in founder-managed firms by investigating cases in which firms were forced to file restatements to previous years' reported financial results in response to threatened or actual litigation, or SEC inquiries and enforcement actions. The incidence of restatements under these conditions is indicative of governance failure, because they are likely to arise when at least some shareholder interests are disregarded or when one shareholder group is favored over another, an issue at the heart of recent scholarship on executive malfeasance (e.g., O'Conner et al., 2006; Donoher and Reed, 2007; Donoher et al., 2007; Zhang et al., 2008). Therefore, the question this study asks is whether firm founders or boards of directors, or both combined, either minimize or facilitate the production of misleading disclosures, thereby signaling governance efficiency or governance failure. With this basis in mind, the study evaluates the effects of founder influence and board control on the financial disclosure process by adapting the traditional agency model to the context of founder-managed firms. Specifically, the influence of founders on the firm as a whole and on the board's ability to monitor and control executive decisions is the focus adopted in this research. The article concludes by exploring the theoretical and practical implications of the findings. THEORETICAL FOUNDATION AND HYPOTHESES Founders and Agency Costs As Jensen and Meckling's (1976) seminal work demonstrated, once a firm moves from being owned and managed by a single individual for personal benefit to being an organization with at least partial outside ownership, a separation of ownership from control occurs that gives rise to a potential agency problem. Thus, monitoring and incentive alignment become necessary costs of doing business. Viewed strictly in these terms, an argument can be made within the traditional agency model that the presence of firm founders should result in lower agency costs than those experienced by firms led by outside management, if only because the degree of separation between ownership and control is minimized (Fama and Jensen, 1983a). Taken one step further, Jensen and Meckling's (1976) arguments can be read to imply that, apart from sheer redundancy, agency controls actually may diminish firm performance (Schulze et al., 2001). Outside of the agency paradigm, stewardship theory (Davis et al., 1997; Donaldson and Davis, 1991; Wasserman, 2006) also lends support to the notion that founders may have a special interest in protecting and nurturing the firm. …
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