Mette Neville

The role of boards in small and medium sized firms

This Paper aims to investigate the role of boards in owner-managed SMEs, and it seeks answers to the questions of whether boards generally enhance good governance in SMEs, and whether the use of outside board members plays a significant role. Finally the question of whether in practice owner-managers see their boards as a resource is examined. The paper is based on a study of the ownership and control structure in 1313 SMEs and an interview survey of 1,040 Danish owner-managed SMEs. The analysis of the empirical studies indicate that the role of a board as a resource is more important than its control role, which suggests that there should be a multi-theory approach to board roles in SMEs. It also indicates that good governance appears to be associated with the existence of boards and of outside board members, and finally that boards in SMEs remain an untapped resource. The article contributes to the empirical literature on the role of boards. It contributes to the understanding of the role of boards in SMEs and to whether boards enhance good governance in SMEs. It also gives insight to whether boards are an untapped resource in SMEs. As SMEs are the most important engines for stimulating economic growth in the European Union, the governance level in SME is important, and the findings prompt the question of how to make owner-managers more aware of the advantages offered by a board.

Promoting Entrepreneurship - the New Company Law Agenda?

Promoting entrepreneurship is high on the agenda at both European and national level. This is, e.g., reflected in a number of company law initiatives, which have mainly focused on creating easier and cheaper access to limited liability, for example, by introducing sub-types of the private limited company. The main questions addressed here are whether it is possible to promote entrepreneurship through company law reforms and what the content of such frameworks should be in order to meet the needs of entrepreneurs. The analysis takes its point of departure in a new Danish survey of what the content of company legislation should be in order to meet the needs of entrepreneurs. In line with existing empirical studies, the importance of the capital requirement and formation procedures and costs is analysed, and further insight is given into, for example, what level of minimum capital and cost is regarded as acceptable. Besides this insight, the Danish survey adds to the existing studies and literature by also shedding light on whether company laws can be further optimised, for instance, by introducing more flexible rules for company management, etc. The results of the survey are compared with the reforms which, in recent years, have been adopted in several EU Member States, with the aim of evaluating whether these have met the needs indicated in the survey. The overall conclusion is that this is not the case on all points and that there is thus room for improvement. It is also briefly discussed whether the different reform methods used in the recent national reforms are well-suited for further optimising the legislation and it is shown that the method of introducing sub-types of private limited companies has its limitations.

A Statutory Buy-Out Right in SMEs - An Important Corporate Governance Mechanism and Minority Protection?

It is well known that conflicts between shareholders are the Achilles heel of small and medium sized companies. The risks and consequences of such conflicts have generally resulted in the adoption of company law mechanisms for dissolution or redemption where those in control have abused their power, for example by oppressing the minority shareholders or by gaining private pecuniary benefits (opportunistic behaviour). However, many conflicts between shareholders have nothing to do with oppressing a minority shareholder or gaining private pecuniary benefits. Empirical studies show that very often conflicts between shareholders concern disputes about the strategic development of the company, for example about growth. Traditionally it is assumed that the primary interest of all shareholders is profit maximisation, and that in companies with concentrated ownership the minority shareholder will, as a rule, enjoy the shared benefits of control. But as shown in this contribution, owner-managed small and medium sized enterprises (SMEs) do not to live up to this assumption. The business objectives of SMEs are very different from those of listed companies, so that for example growth, high profits and salaries often have a lower priority than control and independence. This means that there is great potential for conflicts between shareholders and for inefficient management of the company. As there is little or no market for shares in SMEs, and especially not for a minority shareholding in an SME where there is an existing conflict between the shareholders, the shareholders are often locked into the company without the possibility of switching their investment and involvement to another, more rewarding company. From a corporate governance perspective it is relevant to discuss whether there is a need to create default rules giving minority shareholders a possibility of putting pressure on the controlling shareholder(s), who is often the manager of the company, to improve performance, for example by giving the shareholders a right to exit at will. The relevance of this discussion is supported by the fact that there has been a paradigm shift in company law thinking, so that greater emphasis is now being put on the idea of making legislation more business-friendly, by focusing on the needs of business in relation to the different types of companies that are the frameworks for business activities, instead of focusing on the prevention of abuse. In this contribution the focus is on resolving conflicts in SMEs. Using a number of empirical studies, on the one hand there is a review of the special risks of conflicts in SMEs, and on the other hand there is a review of the most common kinds of conflicts and their possible consequences. Some examples are given on how companies legislation in different countries regulates conflicts, and it is stated that the existing rules do not give sufficient protection to the parties in connection with different kinds of conflicts. It is argued that there is a need for an expanded exit right, and a proposal is made for the introduction of a default rule in the form of a statutory buy-out right.

Social Enterprises: How Should Company Law Balance Flexibility and Credibility?

In recent years, many countries have introduced special regimes to facilitate the organisation of social enterprises. Many of these include company law rules which may either provide for a special corporate form for social enterprises, or are part of a certification scheme for such enterprises. This article analyses how these company law issues have been addressed. It focuses on the US benefit corporation, the UK Community Interest Company and the recently proposed Danish certification regime for social enterprises. An analysis is made of how the different systems aim to find the right balance between flexible rules that are sufficiently attractive to entrepreneurs and (social) investors, and rules which ensure that the designation of ‘social enterprise’ is credible. It is pointed out that the three systems balance these requirements quite differently, and the advantages and disadvantages of each are discussed. One of the key elements in the governing of social enterprises is the regulation of how assets can be transferred from these enterprises. It is concluded that a certification scheme seems preferable to a new corporate form, and several recommendations are made as to how to find a system that is more credible than the US solution and more flexible than the UK and Danish solutions.