Chapter 11: Governance Theory: Origins and Implications for Researching Boards and Governance in Entrepreneurial Firms
Jonas Gabrielsson and Morten Huse INTRODUCTION All firms, small as well as large, new as well as old, can be described as having two complementary systems: a production system and a governance system. The production system consists of the business activities used by the firm to facilitate the transformation of input resources into the output that is offered on the market. Activities organized and carried out in most firms include procurement, operations, logistics, marketing and sales, and interaction with suppliers and customers. The overall focus is to manage the firm and its input resources to efficiently and effectively design, produce and distribute its output. The governance system, on the other hand, allocates rights and responsibilities among the various providers of input resources in and around the firm and gives some of them – generally the providers of financial resources – the power to make decisions and exercise control to influence the direction and performance of the enterprise (Huse, 2007). The overall focus is on determining how critical resources will be acquired, controlled and deployed so as to increase the wealth of the business, and how to deal with conflicts between various coalitions of resource providers who have potentially divergent goals. The governance system in a firm includes both external and internal mechanisms that direct, administer and control the firm and its operations (O’Sullivan and Diacon, 1999; Collin, 2003). Examples of external governance mechanisms include competition on product markets, state legislation and regulations, managerial labor markets, and pressure from the media. Examples of...
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