“Outside” directors in SME boards: A call for theoretical reflections

Abstract

Good governance for SMEs is critical for economic development and growth in both developed and developing economies. In this paper we focus on boards and governance in small and medium sized enterprises (SMEs) by investigating the role and contribution of “outside” directors in this setting. By contrasting board role theories against different types of SMEs, firms are expected to recruit “outside” board members for various reasons. Illustrated by 52 empirical studies of “outside” directors in SMEs we show how agency theory, resource based view of the firm, and resource dependence theory can be applied to understand the multiple roles that “outside” directors can play in family firms, venture capital-backed firms and other SMEs. The illustration shows that the concept “outside” director is not the same in different theories and in different empirical settings. Based on this finding, we argue for the need to have a conscious and balanced use of theories for understanding the role and contribution of “outside” directors in SMEs.