1. Governance Life-cycle Conference, 10-11 April 2003 Nantes, 20-21 March 20031 Click to edit Master title style Click to edit Master text styles –Second level Third level –Fourth level »Fifth level 1 “LEARNING THROUGH CORPORATE BOARDS”: A KNOWLEDGE-BASED MODEL OF GOVERNANCE DEVELOPMENT IN ENTREPRENEURIAL IPOs. Igor Filatotchev Bradford University School of Management

2. Governance Life-cycle Conference, 10-11 April 2003 Nantes, 20-21 March 20032 “LEARNING THROUGH CORPORATE BOARDS”: A KNOWLEDGE-BASED MODEL OF GOVERNANCE DEVELOPMENT IN ENTREPRENEURIAL IPOs. Background Theoretical framework Data and research methodology Empirical results Future research

3. Governance Life-cycle Conference, 10-11 April 2003 Nantes, 20-21 March 20033 Corporate Governance in the IPO Context Environment A “threshold” firm: transition from entrepreneurial to professional management. The dilution of founders’ ownership and misalignment of incentives. ‘Underpricing’ and wealth transfer from the founders and initial shareholders (VCs, business angels, families, etc). The governance system may be an endogenous outcome of the founding team’s strategic decisions and leadership features. A balance between monitoring, resource and strategy roles of corporate governance

4. Governance Life-cycle Conference, 10-11 April 2003 Nantes, 20-21 March 20034 Research Framework Founders’ knowledge and experience is a major driving force behind board selection process. Founders’ entrenchment provides a negative effect on selection of experienced board members and their equity-based incentives. Knowledge-related characteristics of the board contribute to the quality of a “threshold” firm and improve its stock market performance. Building on a knowledge-based view of the firm this paper suggests that:

5. Governance Life-cycle Conference, 10-11 April 2003 Nantes, 20-21 March 20035 Contingency Model IPO “underpricing” Founders’ experience and power VC firm’s involvement with IPO Executive directors’ experience and share ownership Firm’s demography, environmental and institutional control factors Independent directors’ experience and share ownership

6. Governance Life-cycle Conference, 10-11 April 2003 Nantes, 20-21 March 20036 Research Hypotheses (1): Founders’ Experience and Board Characteristics Experienced founders of the IPO firm are more likely to recruit experienced executive directors. Experienced founders of the IPO firm are more likely to recruit experienced independent directors. Experienced founders of the IPO firm are more likely to provide independent directors with financial interest in the firm.

7. Governance Life-cycle Conference, 10-11 April 2003 Nantes, 20-21 March 20037 Research Hypotheses (2): Founders’ Entrenchment and Board Characteristics The founders’ share ownership and board leadership position are negatively associated with directors’ experience and share ownership. The VC firm’s retained share ownership is positively associated with directors’ experience and share ownership.

8. Governance Life-cycle Conference, 10-11 April 2003 Nantes, 20-21 March 20038 Research Hypotheses (3): Board Characteristics and ‘Underpricing’ IPO board experience is negatively associated with underpricing. IPO board members’ share ownership is negatively associated with underpricing.

9. Governance Life-cycle Conference, 10-11 April 2003 Nantes, 20-21 March 20039 Data 631 IPOs, 1 January 1999 to 31 September 2002; Excluding: –investment vehicles, equity carve-outs, de-mergers, etc. –IPOs where the founders are not identified. 281 ‘entrepreneurial’ IPOs. Data collected on ownership structure, ‘interlocks’, VC involvement, etc. To construct a sample of entrepreneurial IPOs, a multi stage data collection procedure has been used.

10. Governance Life-cycle Conference, 10-11 April 2003 Nantes, 20-21 March 200310 Empirical Results Founders’ experience is positively associated with board experience and equity interests. This association is negatively moderated by founders’ entrenchment and board power. VC retained ownership has no effect on board selection. Underpricing is affected by the executives’ retained ownership.

11. Governance Life-cycle Conference, 10-11 April 2003 Nantes, 20-21 March 200311 Discussion and Future Research Knowledge and strategy models of corporate governance. Incentive alignment may affect performance indirectly, and its effects are contingent on socio-political dynamics of boards. A need to re-evaluate the roles of large-block shareholders in general, and VCs in particular, in governance development in the “threshold” firm The paper’s findings suggest a number of important implications for governance and strategy research: