Entrepreneurial Governance

17 Pages Posted: 18 Jan 2001

See all articles by Michael J. Whincop

Michael J. Whincop

Griffith University - Griffith Law School

Date Written: August 2000

Abstract

The primary regulatory concern with respect to small to medium enterprises (SMEs) is capital raising, which reflects the so-called finance gap. For listed corporations, however, most attention is directed to corporate governance, because of the agency costs associated with more dispersed ownership and their infrequent resort to capital markets. What is lacking is an account of corporate governance issues arising in SMEs. Why is this significant? First, existing theories of the endogeneity of boards, such as those developed by Fama and Jensen, do not explain the careful work of venture capitalists to develop strong boards, including outside directors. Why do they do such a thing, instead of addressing exchange issues on a purely bilateral basis with the entrepreneur? Second, to the extent that corporate governance influences the scale of transaction costs, we might expect that governance is systematically related to the capacity of firms to raise finance, both venture capital and in an IPO.

In order to address these issues, this paper draws on a number of distinct literatures - the economic literature on venture capital, the organisational behavior literature on trust, the management literature on industrial networks, and the law and economics theorisation of the role of norms in contracts. It develops an informal theory that the venture capitalists's contract with the entrepreneur establishes formal end-game norms; these are "kept in the bottom drawer" while the relation remains cooperative. The board has a role in providing the possibility of cooperation within the strategy space marked out by these EGNs. In addition, it functions as an information conduit by which third parties may function to enforce relational norms. The legal rules that support these functions are also examined.

JEL Classification: G24, K22

Suggested Citation

Whincop, Michael J., Entrepreneurial Governance (August 2000). Available at SSRN: https://ssrn.com/abstract=254169 or http://dx.doi.org/10.2139/ssrn.254169

Michael J. Whincop (Contact Author)

Griffith University - Griffith Law School ( email )

Nathan Campus, GU
Nathan 4111
Australia
+617 3875 6559 (Phone)
+617 3875 5599 (Fax)

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