Corporate Governance and Strategic
Change in SMEs: The Effects
of Ownership, Board Composition
and Top Management Teams
Olof Brunninge*
Mattias Nordqvist
Johan Wiklund
ABSTRACT.
This paper investigates how governance mecha-
nisms affect the ability of small- and medium-sized enterprises
(SMEs) to introduce strategic change. Previous research typically
assumes that governance mechanisms operate independently of
each other. Building on agency theory and insights from the
literature on small firm governance, we hypothesize that gover-
nance variables related to ownership, the board of directors and
the top management team all affect strategic change and that it is
important to examine the interaction effects of these governance
mechanisms. Using a longitudinal sample of over 800 SMEs, our
general logic and hypotheses are supported by the analyses. We
find that closely held firms exhibit less strategic change than do
SMEs relying on more widespread ownership structures. How-
ever, to some extent, closely held firms can overcome these
weaknesses and achieve strategic change by utilizing outside
directors on the board and/or extending the size of the top
management teams. Implications for theory and management
practice in SMEs are discussed.
KEY WORDS: corporate governance, small- and medium-
sized enterprises, strategic change
JEL CLASSIFICATION: L26.
1. Introduction
Over the last 15 years corporate governance has
become one of the most common terms in busi-
ness and finance discourses (Keasey et al., 2005).
Corporate governance is associated with the de-
fense of shareholders’ interests by the use of firm
governance devices (Johnson and Greening,
1999; Shleifer and Vishny, 1997; Short et al.,
1999). It can be broadly defined as the exercise of
power over corporate entities (Tricker, 1997).
Contemporary corporate governance literature is
very broad. It covers a number of issues with a
shared focus on the relationship between owners,
board of directors, top management teams
(TMTs) and CEOs, as well as the remuneration of
executives at different levels (Keasey et al., 2005;
Monks and Minow, 2004; Tricker, 1996). A
problem with governance research is that with
few exceptions, studies have investigated one type
of governance mechanism, most commonly the
board, while excluding others (e.g., Daily and
Dalton, 1993; Forbes and Milliken, 1999;
Johnson et al., 1996; Rediker and Seth, 1995;
Zahra and Pearce, 1989). Especially, the notion of
corporate governance as dealing with the inter-
action between a firm’s ownership, board and top
management has not been sufficiently explored in
the literature (Monks and Minow, 2004; Tricker,
1996). In this paper, our aim is to take a step
towards overcoming some of these shortcomings
by examining how different governance devices
operate and interact to promote small- and
medium-sized firms’ (SMEs) ability to change
strategically.
The ability of an organization to change its
strategy in line with evolving and changing
internal capabilities and environmental condi-
tions is a key outcome variable of governance
research (Goodstein and Boeker, 1991; Pettigrew,
1992). Despite this, most studies have focused on
explaining aspects of financial performance,
while few have examined how the broader
governance structure of the firm affects strategic
Final version accepted on October 2006
*All three authors have contributed equally to the
paper. Their names are listed alphabetically.
Olof Brunninge, Mattias Nordqvist and Johan Wiklund
EMM,
Jo
¨
nko
¨
ping Intl. Business School,
Jonkoping, 55111, Sweden,
E-mail: brol@jibs.hj.se
Small Business Economics (2007) 29:295–308 Ó Springer 2007
DOI 10.1007/s11187-006-9021-2
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