Boards of directors play an important governance role in companies by monitoring executives and firm performance. But not all boards are alike. The boards of public firms are accountable to shareholders and offer a perspective removed from daily operations. Venture boards, on the other hand, are far more hands-on and have a different focus because their firms are not traded on the open market. Yet until now, all the received wisdom about boards has focused on public firms.

Professor Sam Garg has stepped in to fill that breach by teasing out the special features of venture boards and their likely impact on firm performance. He defines ventures as privately-owned, professionally-funded firms (also known as entrepreneurial firms), which have become important for economic growth and innovation.

“Boards of directors are a primary governance mechanism of ventures and they are likely to have a distinctive monitoring function relative to public firms. For example, the separation between ownership and control is less relevant in ventures because their CEOs typically have greater alignment of their financial interests with owners than public firm CEOs.

“Ventures are also often at earlier stages of development, have fewer slack resources, operate in highly uncertain and changing environments, and are typically focused on innovation.

“These factors suggest board monitoring may be different, more frequent and more critical because of high risk and the different types of risks.

“Furthermore, outside directors in ventures often have strong financial incentives associated with the venture’s success and greater knowledge of its sector, which suggests they are more likely to be motivated to monitor and their monitoring is more likely to be valuable for the performance of the venture.”

Still, there are likely variations in the nature of this monitoring depending on the characteristics of the firm and the board composition. Professor Garg outlined the key factors to consider.

First, if the venture’s CEO is also the founder, the board will be more likely to monitor because even though the CEO’s financial interests may be aligned with the board’s, he or she is also likely to tie personal identity to the firm, which affects his/her decisions. Professor Garg cited the example of Polaroid whose founder CEO was committed to a business model that inhibited the firm from adapting to significant technological change in the industry.

The stage of a venture’s development can also affect monitoring. Venture boards are more likely to monitor at the beginning, when things are more volatile, and at the end when they are seeking an exit through an IPO or acquisition. Monitoring in the middle is likely to be lighter.

When it comes to board composition, boards with more founder directors who are not current executives are likely to monitor more because of their investment, attachment and knowledge of the firm.

But having more independent directors may reduce monitoring because they will be more interested in offering expert advice or enhancing their status through board membership, rather than seeking a pay-off.

Having more directors from venture capital firms may have mixed effects on monitoring. In general they are focused on the pay-off which will incline them to monitor, particularly if there are first-time directors and have overlapping investments that need to be co-ordinated with the focal venture firm. However, monitoring may be reduced if the venture capital director is of a high status and reputation with less to prove and the ability to appoint key people to the firm. The presence of more corporate venture capital directors may also reduce monitoring because they are more interested in innovation or intellectual property rather than a pay-off.

Professor Garg noted that the level of monitoring could have direct impacts on the firm’s performance. While monitoring in itself helps to create accountability, too much can inhibit the risk-taking inherent to innovation and bog down executives. So boards have to find a happy balance.



Overall, Professor Garg’s most important contribution is that he provides a theoretical framework for understanding monitoring by the boards of ventures in contrast with public firms, whose numbers are declining as firms choose to remain private for longer or revert to being private again. Venture boards have distinctive characteristics that affect their behaviour and, ultimately, their impact on firm performance. “The characteristics of the venture (e.g., founder versus nonfounder CEO, development stage) ‘pull’ directors to monitor, whereas characteristics of the directors (e.g., differences in the personal motivations, professional obligations and ability to monitor of various types of directors) ‘push’ directors to monitor,” he said.