Careful who you ask to serve on the board of directors of your start-up!
It matters who you ask to serve on your board of directors if you’re a start-up looking to grow. New Danish-Norwegian research from Aarhus BSS at Aarhus University, among others, sheds some helpful light on the matter.
Let’s imagine you’ve started a new venture. It has got off to a good start and has growth potential. Now you would quite like to appoint a board of directors whom you can look to for input and support as you turn your attention to the day-to-day running of the business, and do not have much time and energy to devote to more strategic thinking.
What do you do? Who do you ask? How do you find the right people?
Our research shows that the fact that they come from outside is not what creates growth. What matters is, first and foremost, their industry and directorial experience
Professor Lars Frederiksen, Department of Management, Aarhus BSS
Family, friends or outside board members
Some choose family members, people they know from the industry, an advisor, professional board members, etc. But does it work, and do board members support venture growth?
For many new start-ups – struggling to gain a foothold in their market – this is by no means an unfamiliar scenario.
New research from Aarhus BSS at Aarhus University and NHH Norwegian School of Economics in Bergen shows that the composition of your board of directors matters for the economic performance of the start-up. Especially when it comes to board members who are brought in from outside.
Experience
“Some start-ups appoint a board of directors as soon as they launch, while others do it after some time, and many of them appoint outside board members, perhaps to bring in fresh perspectives. However, our research shows that the fact that they come from outside is not what creates growth. What matters is, first and foremost, their industry and directorial experience. But in different ways and at different times,” explains Professor Lars Frederiksen, Department of Management at Aarhus BSS. He conducted the study with two Norwegian colleagues, Tatevik Harutyunyan and Bram Timmermans from NHH Norwegian School of Economics, and the study has been published in the prestigious Journal of Business Venturing.
The researchers analysed register data from 15,594 private businesses established in Norway between 2005 and 2012. The timings of the initial appointment of the boards and changes in board composition were recorded and analysed, while developments in sales figures and payroll costs were used as a measure of growth.
“Generally speaking, our study shows that there are immediate advantages to inviting outside board members with industry experience to join the board, while directorial experience is associated with growth in the longer term. We have found that the combination of industry and directorial experience is particularly powerful,” explains Lars Frederiksen.
Growth in sales
Our statistical models show that businesses that bring in outside board members with industry experience increase sales by an average of approximately NOK 1 million. Businesses that bring in outside board members with directorial experience increase sales by slightly less than half. The combination of industry and directorial experience results in an average increase in sales of NOK 1.1 million. The researchers do not detect any significant increase in payroll costs.
“However, it matters which industries we are talking about, and timing can also play a role,” says Lars Frederiksen and explains further:
“Our analyses suggest that the service industry benefits most from directorial experience, while industry experience matters most for more manufacturing-focused start-ups. In some industries, both types of experience play a role in the work of boards, but while industry experience seems to have an immediate impact, the impact of directorial experience typically materialises over time.”
Facts
We strive to comply with Universities Denmark’s principles for good research communication. For this reason, we provide the following information as a supplement to this article:
Type of study | Longitudinal study on a panel of Norwegian registry data. |
| External partners | None |
| External funding | None |
| Conflict of interests | None |
| Other | No |
| Link to scientific article | Outside board director experience and the growth of new ventures |
| Contact information | Professor Lars Frederiksen, l.frederiksen@mgmt.au.dk |