The factors that encourage or discourage the appointment of outside directors to the boards of private companies in New Zealand

Abstract

The issue motivating this study is the discrepancy between the academic and practitioner literature’s strong advocacy of outside directors on the boards of private companies, and the absence of outside directors on many private company boards in New Zealand. Previous research has focused primarily on the role of outside directors in private companies, the firm based situational circumstances under which they might be beneficial, and the preferred attributes of outside directors. These studies have not however given a substantial focus to owner-based factors that influence the decision to appoint or not to appoint outside directors. Through interviews of 13 private company owners, this study explores the research question: ‘What are the factors that encourage or discourage the appointment of outside directors to the boards of private companies in New Zealand? The study attempts to understand the way in which private company owners assess the net benefit of outside directors. The result of this research is to identify four broad owner based factors that may encourage or discourage the appointment of outside directors. These relate to the owner’s personal strategy, the owner’s attitude to sharing control of their firm, the owner’s awareness of corporate governance models, and the characteristics of the owner’s network. Additionally key firm-based situational factors are also identified that moderate the effect of owner-based factors. This research offers some theoretical contributions and practical implications that may allow some of the barriers to appointing outside directors to be addressed. As in many countries, private companies in New Zealand represent a vast proportion of overall economic activity and if the presence of outside directors can improve the governance of these firms, understanding and addressing these barriers may lead to stronger and more sustainable economic growth from this sector.