The Performance Effects of Independent Directors: A Large-Scale Study of Danish New Ventures

Abstract

Research Question/Issue

This study investigates the effects of independent outside directors on the performance of new venture firms. We also study several factors moderating the relationship between the percentage of independent directors on boards and the new ventures' performance.

Research Findings/Insights

Using a large-scale sample of 5183 Danish new ventures active in 2015–2020, we find support for our hypothesis that the percentage of independent directors has an inverted U-shaped effect on new venture performance. The results also show that firm-level factors, that is, founder equity and venture age, cushion and amplify this nonlinear effect.

Theoretical/Academic Implications

Drawing on resource dependence theory as an exchange theory, we propose that increasing the proportion of independent directors yields linearly increasing gains (i.e., resource-provisioning benefits) but also induces costs of sacrificing managerial control, which accelerate nonlinearly. Our findings show that a smaller proportion of independent directors benefits new ventures, but as their proportion grows, the performance gains become smaller, eventually leading to negative marginal effects.

Practitioner/Policy Implications

Practitioners will find our findings of interest because, contrary to the recommendations of policymakers and many prior studies, they show that having a high proportion of independent directors on the boards of new ventures does not always improve new venture performance. Founders of new ventures should be aware of the trade-off between the benefits of obtaining additional resources and the costs of sacrificing managerial control.