Are outside directors on the small and medium-sized enterprise board always beneficial? Disclosure of firm-specific information in board-management relations as the missing mechanism

Abstract

In board governance literature and practice, the presence of outside directors is presumed to have a beneficial effect on board effectiveness and firm performance. This study challenges this prevailing view by exploring the boundary conditions and intermediate mechanism preventing the potential benefits of outside directors. Our results reveal that reality is more complex than previously assumed. Using unique data from a sample of 561 Belgian small and medium-sized enterprises, we find that the presence of outside directors has a neutral or even negative effect under certain boundary conditions on board service engagement in the small and medium-sized enterprises context. Family ownership control and infrequent board meetings are two important contingencies that reduce management’s propensity to disclose firm-specific information to the board in the presence of outside directors. The disclosure of such information, in turn, serves as a critical mechanism to offset firm-specific information asymmetry, associated with better board service engagement and (indirectly) enhanced firm performance. Based on our study, we articulate new theoretical insights for understanding board governance in small and medium-sized enterprises, which integrate existing board governance theories with the dominant coalition context, serving as a springboard for future board governance research.