Theoretical Contributions to Governanceof Smaller Firms

INTRODUCTIONDutta and Thornhill (2013) have theoretically questioned why some smaller firms survive while others do not. Scholars of small business and entrepreneurship have addressed this question from various theoretical perspectives. Castrogiovanni and Justis (2002) claim small business success may be better understood by resorting to theories relevant to strategic and contextual factors. Weinzimmer, Michel, and Franczak (2013) have attributed the understanding of business survival to theories of strategic orientation. Goldsby and Nelson (2012) argue that viability of small businesses may be comprehended via theories on firm design advantages.In our view, theories related to firm governance may also advance our understanding of why some smaller firms may become viable, while others may not. The topic of firm governance has received a great deal of attention not only because of its theoretical importance, but also because of its enormous practical importance (Shleifer & Vishny, 1997: 737). Firm governance may be defined as the power to manage or deploy enterprise resources and to resolve the conflicts of interests that may arise among the related participants. Scholars from a variety of disciplines have devoted their efforts to the study of this topic. In order to further our understanding of firm governance and its implications for enterprise viability, researchers have resorted to a number of related theories. Each of the various theories has shed light on some aspects of firm governance, but neglected other prominent aspects of governance. As suggested by Weick (1979), a good theory enlightens us with some dimensions of reality, but no theory can inform us with all dimensions of reality. Consequently, a multitheoretic elaboration may leverage the contributions of divergent theories and offset what each theory has not addressed.Our goal is not to cover all the theories related to firm governance, but to focus on agency, stewardship, resource dependence, and cognitive theories. Since the most dominant approach to the study of governance has utilized agency theory, we discuss this theory in relation to the other theories. Initially, we focus on agency and stewardship theories because they are in contrast to each other and may serve as substitutes with respect to small firm governance. Subsequently, we relate resource dependence and cognitive theories to agency theory because they enrich each other and may serve as complements regarding small firm governance. As will be evident, our elaborations, which are based on research evidence, may have appeal to those interested in small firm viability.THEORIES REVISITEDJuxtaposition of Agency and Stewardship TheoriesFirm governance has been substantially influenced by agency theory. The question posed by this theory is whether the power to manage the enterprise is used to benefit the principal, or the owner of enterprise resources, versus the agent, or the manager of enterprise resources (Jensen & Meckling, 1976). Grounded in financial economics, the concern of agency theorists is with the conflicts of interests between owners and managers of firm resources. In this vein, the separation of ownership and management of enterprise resources is expected to lead to conflicts because the wishes of the owners are assumed to be distorted by the managers in ways that benefit the managers, but at a cost to the owners (Fama & Jensen, 1983). If managers are allowed to be wasteful with firm resources and not maximize the wealth of the owners, then presumably enterprise viability suffers. The emphasis of agency theory researchers is on the protection of the interests of the principal since the interests of the agent are protected by market forces (Fama & Jensen, 1983; Jensen & Meckling, 1976). That is, if the agent is abused by the principal, such as being paid less than market wages, he or she could seek employment with another principal who pays market wages. …