Entrepreneurial firms grow up: Board undervaluation, board evolution, and firm performance in newly public firms

• Date: 01 November 2019
• Author: Jason D. Shaw,Sam Garg,Qiang John Li
• DOI: http://doi.org/10.1002/smj.3036
• Published date: 01 November 2019

RESEARCH ARTICLE

Entrepreneurial firms grow up: Board

undervaluation, board evolution, and firm

performance in newly public firms

Sam Garg

1

| Qiang John Li

1

| Jason D. Shaw

2

1

Department of Management, HKUST,

Kowloon, Hong Kong

2

Department of Leadership, Management,

and Organizations, Nanyang Technological

University, Singapore

Correspondence

Sam Garg, Department of Management,

HKUST Business School, Clearwater Bay,

Kowloon, Hong Kong.

Email: samgarg@ust.hk

Funding information

Research Grants Council of Hong Kong,

University Grants Committee, Grant/Award

Number: 26500616

Abstract

Research Summary:An initial public offering (IPO)

ushers in many changes to the organization's boards of

directors, including the installation of a formal and compre-

hensive board leadership structure. This paper shows that

higher board undervaluation, that is, the average degree to

which directors' qualifications based on normatively

accepted criteria for board leadership are not duly reflected

in their appointments to the board chair and committee

chair positions, is associated with higher director turnover,

and with lower qualifications among new directors in the

subsequent years. Further, the effect of board undervalua-

tion on firm performance is mediated both by director

turnover and new directors' qualifications. But these two

mediators operate as opposite forces on performance—

director turnover is associated with lower firm performance,

but counter-intuitively lower new-director-qualifications are

associated with higherfirm performance.

Managerial Summary:How should a priv ately-held entre-

preneurial firm design its board leadership structure at IPO?

What are the implications for board evolution and even firm

performance? We find that higher board undervaluation,

that is, the average degree to which directors' qualifications

based on normatively accepted criteria for board leadership

are not duly reflected in their appointments to the board

chair and committee chair positions, is associated with

higher director turnover, and with lower qualifications

among new directors in the subsequent years. These two

Received: 31 May 2018 Revised: 22 February 2019 Accepted: 1 March 2019 Published on: 10 June 2019

DOI: 10.1002/smj.3036

1882 © 2019 John Wiley & Sons, Ltd. Strat Mgmt J. 2019;40:1882–1907.wileyonlinelibrary.com/journal/smj

evolutionary paths act in opposite ways on performance—

director turnover lowers firm performance, but lower new-

director-qualifications improve firm performance. This has

important implications for boards, investors, and stock

exchange guidelines on board leadership structure.

KEYWORDS

board evolution, board leadership, board recruitment, entrepreneurial

scaling, initial public offering

The initial public offering (IPO) is a significant milestone for organizations (e.g., Beckman &

Burton, 2008). Among the many changes it brings, an important concern involves composition of the

board of directors (e.g., Certo, 2003; Chen, Hambrick, & Pollock, 2008; Higgins & Gulati, 2006).

But despite the centrality of the board, few studies investigate the consequences of the decisions

about board leadership at IPO—the appointment of the board chair and the chairs of newly installed

committees (Hochberg, 2012).

In a recent advance, Garg, Li, and Shaw (2018) introduced the construct of director undervalua-

tion. An outside director is undervalued when the director's experience, qualifications, and overall fit-

ness according to normatively accepted criteria for chair appointments are high vis-à-vis fellow

outside directors on the board but not recognized by appointments to the chair positions. We concep-

tualize board undervaluation at the aggregate (board) level as the average degree to which directors'

qualifications based on normatively accepted criteria for board leadership are not duly reflected in

their appointments to the board chair and committee chair positions. Normatively accepted criteria

refer to typical factors, procedures, or customs that can be reasonably or legitimately used to make

chair assignments, including factors such as the quality and variety of a director's experience on

boards or as Chief Executive Officer (CEO)/top executive, tenure on the focal board, and education.

In simpler terms, board undervaluation refers to the underutilization of directors in the board leader-

ship roles. In their study of IPO boards, Garg and colleagues found higher board undervaluation was

associated with higher director turnover levels.

In this paper, we take this line of inquiry two steps forward. First, we develop theory and provide

evidence concerning how board undervaluation also shapes the recruitment of new directors. Thus,

we go beyond board turnover to include board recruitment and thus provide a more holistic view of

board evolution. Second, we examine how the two components of board evolution—turnover and

recruitment—affect firm performance. In a 5-year panel analysis of 406 technology-based firms that

executed IPO between 2004 and 2011, we find that as a baseline higher board undervaluation is

related to higher director turnover, consistent with Garg et al. (2018). More importantly, we find that

higher board undervaluation is associated with lower qualifications among new directors and that the

effect of board undervaluation on firm performance is mediated both by director turnover and new

directors' qualifications. However, these two mediators operate as opposite forces on performance—

director turnover is associated with lower firm performance, but counter-intuitively lower new-direc-

tor-qualifications are associated with higher firm performance.

This paper makes several contributions. First, this paper elaborates the emergent concept of board

undervaluation (Garg et al., 2018) by examining the consequences of board undervaluation beyond

director turnover. In so doing, it offers a new parsimonious explanation of board evolution—both

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