Board-CEO Dynamics Driving Growth of New Firms

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Board-CEO Dynamics Driving Growth of New Firms

Amrita Sanker

MSc in Entrepreneurship and Innovation Management 30 Credits

The Faculty of Mathematics and Natural Sciences Department of Informatics

May 2021

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Abstract

Background: The topic of firm growth has been garnering considerable attention in recent times, with the emphasis on organic growth and growth by acquisition. To the extent of my knowledge, many of those scholars have previously tried to study the CEO-board dynamics surrounding the new firm. Nevertheless, research on this topic is disintegrated and requires more focusing on the positive relationship dynamics between the board and the CEO during the making of strategic decisions like firm growth. This study focuses on the relationship dynamics between the CEO and the board and various reasons for the acquisition.

Objective: This study aims to investigate growth by acquisition and the relationship dynamics between the board and the CEO during the making of strategic decisions like firm growth. The resource dependence framework has been used to examine the relationship dynamics between the Board and the CEO.

Methods: This study employs multiple case analyses that make use of semi-structured interviews. An exploratory approach is followed with Eisenhardt’s framework of building theory from case studies regarded as most useful for this study.

Results: The results from this study shows that the Board-CEO relationship dynamics can take many forms during the making of strategic decisions like firm growth. However, it all comes down to a constructive relationship between the Board and the CEO to drive the growth of a firm in the right direction. As part of answering the research question, major motivators for inorganic growth i.e. acquisition growth of different firms were also identified. The major reasons identified are to grow into new markets, killer acquisition, to get hold of complementary resources, and to remove excess capacity from the industry.

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Acknowledgments

I would like to extend my gratitude to my supervisors at the University of Oslo, Truls Erikson and Dennis Gan for their general advice and overall support. Thanks to my friends Nin and Anand for helping me to understand the topic better.

I am indebted to all my interviewees for taking the time off from their busy schedules and accepting my interview invitation.

Finally, a big thank you to my husband, family, and friends for being there for me.

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Table of Figures

Figure 3.1:Eisenhardt (1989) conceptual framework for inducting theory ... 16 Figure 3.2 Stages of an Enterprise growth(Lewis & Churchill, 1983) ... 17 Figure 6.1 Graphical representation of the reasons for acquisition by the companies ... 32

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List of Tables

Table 2.1:Dimensions that will affect firm growth from the perspective of the relationship between

the Board and the CEO... 13

Table 3.1:Different research methodologies based on Yin’s three conditions (Yin, 2014) ... 14

Table 4.1 shows the list of interviewees. ... 24

Table 5.1 Four tests to assure the quality of the research. ... 28

Table 6.1 Reasons of acquisition ranked by the companies. ... 31

Table 6.2 Companies and their respective ranking for different choices. ... 32

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1 Introduction

Every firm has the desire to grow. The growth of a firm may motivate the overall firm performance and profit maximization. Small start-ups wish to grow, and big companies wish to grow more. The outcome is that some firms flourish while others experience a decline in growth. Academicians have acknowledged two types of firm growth strategies: organic growth(internal) and mergers and acquisitions(external) (Andrew, Heather, & Euclid, 1997).

In organic growth, firm growth is executed via the firm’s capacity and resources (Park & Jang, 2011). On the flip side, external growth occurs by acquiring other firms or businesses (Park &

Jang, 2011). Internal growth is usually considered a slower growth strategy because the surge in organic growth is demanding (Park & Jang, 2011). In evaluating the well-being and characteristic of the firm, a productive dynamic relationship between the board and the CEO is required. The main objective of this thesis is to bring to light how does the dynamicity between the board and the CEO influence the growth of a firm.

The topic of interest for the current master thesis research is how the CEO-Board dynamics drive organic growth and how these dynamics facilitate inorganic growth. Further reading brings the subject in deep to the possibility of researching ‘How do the CEO board relationship dynamics influence the firm growth’.

The purpose of the research question is to learn more about the board processes involved during the making of strategic decisions like firm growth and identify the reasons for the acquisition of firms. By addressing these matters, I will learn more about the real-life dynamics between the board and the CEO during the making of strategic decisions like firm growth, and the reader’s comprehension of how firms arrive at acquisition growth is offered a refreshing view.

The first part of the thesis will review the extant literature on the firm growth, reasons for the acquisition, and the relationship between the Board and the CEO during the making of strategic decisions like firm growth. The second part of the thesis covers the methodology part, followed by data analysis and discussion, conclusion, and scope for future research. Coming to the introduction part, begins with the background for this study and the problem framing sections.

Next, the introduction part also includes the objectives and research questions which are presented in the following chapters.

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1.1 Background For The Study

The background for this study originated from my increasing enthusiasm in the topic of acquisition growth and the relationship-building process between the board and the CEO, which were initiated to me in the previous semester, through the course ENT5100. During the course ENT5100, I performed an interview with a CEO and did a case study on how the relationship between the board and the CEO influences the positive transformation of a firm.

The result obtained after performing the interview and case study provided me with awareness into how the relationship between the board and the CEO influences the positive transformation of a firm and how firms do firm growth in practice and the unpredictability involved. The understanding I got on firm growth, piqued my interest in acquisition growth and the dynamicity in the board processes, which is the platform for this research and thesis.

1.2 Problem Framing

The topic of firm growth as a center of attention in the area of entrepreneurship has garnered much attention in recent years (Collins & Porras, 1998; Gundry & Welsch, 2001; Kirchhoff, 1994; Mata, 1994; Ostgaard, Birley, & Development, 1995; Siegel, Siegel, & Macmillan, 1993;

Welbourne, 1997). Many factors influence the growth of a firm from one point to another (Gupta, Guha, & Krishnaswami, 2013). These factors which might influence how firms decide to select a particular growth model are according to (Penrose, 1959; Stinchcombe, 2000) “ the decision-making process might involve factors like age, size and its industry affiliation”. On the first level, the relationship between the board and the CEO, which according to (Garg &

Eisenhardt, 2017) matters during the effective strategy-making process of the growth of a firm.

On the second level, the board provides the CEO with resources such as capital, strategic advice, and networking opportunities (Christine M, Claudia Bird, Renee M, & Sang-Joon, 2014; Hallen & Eisenhardt, 2012). On the third level, it appears that to strategize the growth of a firm in the right direction, the board and the CEO might have to join hands and work together as one powerful unit (Garg & Eisenhardt, 2017).

Delmar, Davidsson, and Gartner (2003) suggest that there are three modes of growth which are acquisition growth, organic growth, or a combination of both. There has been vast literature on acquisition growth and organic growth (Lockett, Wiklund, Davidsson, & Girma, 2011). Having said that, many of these researchers explain different modes of growth, but only a few of them are specifically mentioning about the relationship dynamics between the board and the CEO which influences the firm growth. This indicates that there are misplaced parts in the extant

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literature, worth examining, about the pattern of interaction or communication between the board and the CEO during the making of strategic decisions like firm growth.

To ensure that the research question is not too general, I decided to focus on acquisition growth more which led to the formation of the research question:

How do the CEO-board relationship dynamics influence the firm growth?

1.3 Objectives Of The Research

There are two objectives for this study. It is listed as follows:

i. To explore the relationship dynamics between the board and the CEO during firm growth.

ii. To examine the reasons for inorganic growth, in particular the acquisition for different firms.

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2 Literature Review

In the following chapter, the literature and theories used in the thesis are presented and discussed. Gaining an understanding of the existing research relevant to the topic of interest was important. The literature review is also a way of demonstrating how the research topic matches within a larger branch of learning. Identification of gaps in the literature was the focus of the literature review. The main topic discussed in the literature review is firm growth, organic growth versus acquisition growth, characteristics of firm growth, and the relationship between the board and the CEO during the making of strategic decisions like firm growth.

2.1 Overview Of Firm Growth

2.1.1 Shedding Light on Firm Growth

Firm growth represents one of the essential discussions in the exploration journey of an entrepreneur (McKelvie & Wiklund, 2010). However, the topic of firm growth is still scrambled and little in existing literature (Davidsson, Wiklund, & Firms, 2006). The development of hypothesis in the field of firm growth is insufficient (McKelvie & Wiklund, 2010) mainly because researchers are keen to provide answers to ‘how much’ before providing answers to ‘how’(Penrose, 1959). Understanding the idea of a ‘firm’ is essential to research on the ‘firm growth’(Gupta et al., 2013).To shed light on the firm growth, there is a need to focus on modes of growth (McKelvie & Wiklund, 2010). The mode of growth that firms use for their development lacks adequate recognition in extant literature (McKelvie & Wiklund, 2010).

Growth is a pattern that can be analyzed gradually (Davidsson et al., 2006) which creates a chance for researchers to apply different techniques to measure growth (Weinzimmer, Nystrom, & Freeman, 1998). Experimentation on firm growth has not expanded much owing to its heterogeneous nature (Delmar et al., 2003) and lack of unified growth measures (Brush

& Vanderwerf, 1992; Carpenter & Westphal, 2001; Casciaro & Piskorski, 2016; Chandler &

Hanks, 1993; Davidsson et al., 2006; Delmar & Firms, 2006; Weinzimmer et al., 1998).

There are different notions of firm growth (David, Alex, & Agustí, 2014). According to the scholars, there are four modes of growth which are organic growth, new firm creation, mergers

& acquisitions, and growth through innovation (Delmar et al., 2003).

According to some authors, firm growth ensures firm survival through the addition of economies of scale (Geroski, 1995; John, 1997). Furthermore, firm growth enables firms to

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deal with the market from a better spot by setting in motion the idea of competitive advantage (Patrizio & Fabiano, 2003). On one hand, firm growth is multifaceted (Delmar et al., 2003).

Over a period, all growth firms experience different paths of firm growth (Delmar et al., 2003).

There are too many factors that contribute to firm growth (García-Manjón & Romero-Merino, 2012). Hence it is recommended to have multiple growth measures as it comes up with many forms of organizational growth which justifies that all high growth firms experience different ways of growing (Delmar et al., 2003).

Now coming to small firm growth, more job opportunities originate as small firms grow (Smallbone, Wyer, & business, 2000). Quintessentially, growth is associated with success and more returns for the firm owners (Dobbs & Hamilton, 2007). Whilst more growth is equated with more profit, it also enhances the firm’s possibility of enduring all challenges (Davidsson

& Delmar, 1997; Taylor & Cosenza, 1997). As stated by Phillips and Kirchhoff (1989) small growing firms survive better as compared to those firms that are experiencing stunted growth.

Growth is summarised as a way to safeguard an enterprise as well as growth in revenue of firm owners (Dobbs & Hamilton, 2007).

2.1.2 Definition of Firm Growth

During the initial stages of development of a firm, some firms fade away or some experience stunted growth although some grow or progress (Chandler & Hanks, 1993). Accordingly, firm performance during the primary phase of an enterprise is an equally important part of the research on firm growth (Chandler & Hanks, 1993).

Generally, firm growth is described as the expansion of firm size from one stage to the other and is widely regarded as one of the main points of discussion in management research (Alan

& Alain, 2002; Chandler, 1962; Penrose, 1959). Growth is a salient feature of economic as well as job progress (Birch, 1981; Peter & Sumantra, 1999) and recognizes new firms’ effectiveness towards firm survival (Stinchcombe, 2000). Moreover, growth is also a representation of a definite goal and a wave of accomplishments (Eisenhardt & Schoonhoven, 1990). Gaining an understanding of firm growth can form the basis for knowledge correlated to a competitive landscape, the factors influencing the structure of a market, and the development of aggregate production and consumption activities (Robert & Bruce, 2002).

Passive theoretical development in the field of firm growth is owing to the uncertainty in the theoretical approach used to define firm growth (Nason & Wiklund, 2018). Resource-based approaches contribute to the development of firm growth (Candida, Patricia, Myra, & Harold,

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6 2001; Gilbert, McDougall, & Audretsch, 2006; Michael, 2001; Zupic & Drnovsek, 2014). The most popular ones are Penrose’s (1959\1995) book “The theory of the growth of the firm” and Barney (1991) article “Firm resources and Sustained Competitive Advantage” (Zupic &

Drnovsek, 2014). Barney focused on valuable, rare, inimitable, and non-substitutable resources (VRIN ) and the unique selling proposition of firms while Penrose's theory is about the consequence of firm growth (Nason & Wiklund, 2018). Growth literature was inclined to link both theories; however, this results in inconsistent outcomes both fundamentally and factually (Nason & Wiklund, 2018).

Firm growth, as well as firm survival, are key navigators of changing market systems (Zhou &

van der Zwan, 2019). Firm growth points to a successful business model (Schutjens & Wever, 2000). A fast-growing firm is widely regarded as the guiding force of spreading new ideas and technology in the ecosystem actively as well as the creation of more jobs (Holzl, 2014).

2.1.3 Different Modes of Firm Growth

Lately, entrepreneurs have extensively investigated processes such as narratives and case studies that embrace all aspects of reflection of entrepreneurs and decision-makers (Engleman

& Van de Ven, 2004). The corresponding outlook is necessary to understand how firms go for one growth mode and merge it with another growth mode (McKelvie & Wiklund, 2010).

According to existing literature, different modes of growth (organic, acquisition, or hybrid) may be associated with how firms decide on how to get their product into consumer's hands (Edith, Hugh, & Carl, 1997).

The stagnation in firm growth research can gain new momentum by moving to the question

“what mode of growth firms use and why” (McKelvie & Wiklund, 2010). Internal or organic growth is by bringing new product development strategies to consumers using resources internally to invigorate an existing market or create new products that the markets look for (Gilbert et al., 2006). Creation, development, and implementation of a new product, process, or service can be hugely innovative, where a novel project is executed, or incremental innovation, where company’s existing products or services undergo modifications to improve the functionality and lower costs of the customer experience (Amason, Shrader, & Tompson, 2006). When studying the progressive development of high growth firms it is found that one- tenth of the firms in their selected list of firms fundamentally expand utilizing acquisition (Delmar et al., 2003). Compared to organic growth, growth by acquisition creates more employment opportunities (McKelvie & Wiklund, 2010). Companies, that are booming, pull

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off this feat by acquiring other ventures (Hambrick & Crozier, 1985). Although the different modes of growth are connected to the growth of a venture, this aspect is often overlooked while researching firm growth (Delmar et al., 2003). Penrose proposed that organic growth is analogous to young start-up firms whereas acquisition activity is more linked to large firms (Penrose, 1959). Unexpected negative effects appear for large firms when they go for organic employment as large firms provide more employment opportunities via acquisition (McKelvie

& Wiklund, 2010).

Concerning organic growth, it is widely regarded by Penrose that in the process of firm growth there is also amplification of resources with it (McKelvie & Wiklund, 2010). After a certain period, firms experience obstructions to their growth (McKelvie & Wiklund, 2010). The constraint arises from the fact that the managers are not able to successfully complement the possibility of a favorable circumstance and the resources on hand (McKelvie & Wiklund, 2010). They are not able to do so because of the existence of routines that the firms develop while growing (Nelson & Winter, 1982). These routines evoke a narrow perspective i.e., without concern for broader implications in the life of the firm (Cyert & March, 1963; Teece, 1988; Wesley & Daniel, 1990). When easily accessible opportunities are drained, managers will face difficulties in implementing organic growth (McKelvie & Wiklund, 2010).

Correspondingly, firms that manifest high organic growth earlier may unwillingly look for growth opportunities in less familiar areas (McKelvie & Wiklund, 2010). Organic growth helps in the evolution of similar resources to the resources already present in the set of opportunities that the firm is capable of pursuing (McKelvie & Wiklund, 2010). Complementary resources are a major source of value addition to the firm growth via growth by acquisition (Harrison, Hitt, Hoskisson, & Ireland, 2001a). Organic growth is not a dependable method of development given balanced growth (McKelvie & Wiklund, 2010).

2.1.4 Evolution of Small Firms Regarding Firm Growth

New and small firms have been playing a significant role in economic growth for the last 10 years (Sue & Paul, 1990). Even though there has been an increase in policies for small firms to grow, their growth is not noticeable to a large degree (Sue & Paul, 1990). The growth of small firms may not be significant, yet after a certain period, firms do grow whilst their size stays small (Sue & Paul, 1990). According to prior studies, a firm operates within two environments i.e., internal environment and external environment (Hull & Hjern, 1987). The internal environment consists of resources inside the firm such as the motivation level of the owners,

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8 management style of the owner-managers (Gibb & Scott, 1985), work experience, personal traits of the employees. The external environment includes government regulations, market competition, convertibility rates, political background (Sue & Paul, 1990). Small businesses grow when owners-managers swiftly acquire new skills as well as fit in with the two kinds of the environment as discussed above (Sue & Paul, 1990).

The maximum number of small firms grow via accumulated earnings and find it difficult to finance their business from outside sources (Robert & Bruce, 2002). Nonetheless, accessible internal finance is yet another problem faced by small firms in their development stage (Robert

& Bruce, 2002). The process of a firm using its profit as a source of capital is applicable for small firms specifically (Robert & Bruce, 2002). As reported by the data collected from nonfinancial corporations, the externally generated fund is only close to 10 percent of the total investment throughout the 1990s (Brealey, Myers, Allen, & Mohanty, 2012). Empirical research suggests that financial constraint is another cause of the stagnation of the growth of small firms (Hubbard, 1998). Internal finance plays a vital role in creating a sustainable culture for innovation as well as securing access to a market (Josh & Robert, 1998). Firm activity or growth of small firms can be slashed to a certain extent by large firms where they decrease the price to a point which consecutively affects the internal finance structure of small firms and they find it difficult to sustain in the competitive market (Judd & Petersen, 1986).

2.1.5 Reasons for Acquisition

When small firms evolve, large firms buy or acquire them to get hold of their technology (Granstrand & Sjölander, 1990). During the acquisition process, large firms supply small firms with the required managerial or financial resources when small firms have a more competitive advantage concerning the technology (Granstrand & Sjölander, 1990). Acquisition of small innovative firms assumes a difficult task which is to evaluate the technology they are currently developing (Granstrand & Sjölander, 1990). Hence the large firms spend more time estimating the value of the technology they are contemplating buying (Granstrand & Sjölander, 1990).

Similar situations can also arise when large firms buy small firms to kill the competition posed by the small firms because of their technology (Granstrand & Sjölander, 1990). This is referred to as killer acquisitions when already established firms acquire small innovating firms to prevent the small firms from gaining huge market traction because of their innovativeness (Cunningham, Ederer, & Ma, 2021). By acquiring, the incumbent firm procures the takeover rights to the budding technology to forestall entry (Cunningham et al., 2021).

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The acquisition is also performed to acquire complementary resources (Harrison, Hitt, Hoskisson, & Ireland, 2001b). Complementary resources empower firms with unique and difficult-to-imitate value by clubbing the company’s existing resources and the inherited resources from the acquired firm (Harrison, Hitt, Hoskisson, & Ireland, 1991). This is more likely to create a sustainable competitive advantage and unique opportunities (Harrison et al., 2001b).

The adventures of new venture firms begin when they expand into new and international markets in their beginning stages which is also another form of firm growth and this occurs when companies acquire other firms to expand to new foreign markets (Benjamin & Patricia Phillips, 1994, 1997). There are three essential factors to consider for international expansion which are regulation factors, market factors as well as organizational factors (Brush &

Vanderwerf, 1992). The key benefit of international expansion of new ventures is that they attain increased business growth and can take advantage of the growth opportunities overseas (Shaker, Ireland, & Michael, 2000). Expanding abroad gives new ventures access to a pool of used and unused knowledge which will help them shine over their competitors (Shaker et al., 2000).

Irregular excess capacity induces a firm to develop the business line through the merger to get rid of excess capacity and reduce the manufacturing cost (Maloney & McCormick, 1988).

Acquisition or merger can play a significant role to cut down excess capacity (Maloney &

McCormick, 1988).

2.2 Overview Of the Relationship Between the CEO- Board

The alliance between the CEO and the board is significant to structure the roles, practices, and processes used to direct a company in the right direction (Kathleen & Bourgeois, 1988; Wei, 2003). Earlier researchers have collected abundant data on entrepreneurs (Brockhaus, 1980;

Hsu, Roberts, & Eesley, 2007; Shane, 2000; Shook, 2003) and venture top management teams (Beckman, 2006; Beckman, Burton, & O'Reilly, 2007; Boeker & Wiltbank, 2005; Eisenhardt

& Schoonhoven, 1990; Furr, Cavarretta, & Garg, 2012; Vissa & Chacar, 2009) but they have overlooked the fact that board of directors is also stakeholders for running a venture (Garg, 2013; Wei, 2003). Ventures often experience inadequacy of resources during their initial stages of development (Garg, 2013). Venture directors usually possess knowledge of the sector they

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10 are interested in and a strong financial incentive in the firm’s success which motivates them to have a close relationship with the venture (Garg, 2013). Typically, venture CEOs have emotional as well as financial investment in the firm (Amit, MacCrimmon, Zietsma, & Oesch, 2001). Overall, it seems that venture CEOs and the board directors need to develop a bond to influence the positive transformation of a firm. Venture CEOs depend on their board for social connections (Hallen & Eisenhardt, 2012). Relational pluralism is defined as the network ties that come from other entities outside the organization (Christine M et al., 2014). The Board of directors’ network can shape the relational pluralism of a venture (Christine M et al., 2014).

Another aspect of the relationship between the CEO and the board of directors is that resource v/s power trade-off (Katila, Rosenberger, & Eisenhardt, 2008; Wasserman, 2017) between the CEO and the board of directors can limit CEO discretion (Fama & Jensen, 1983). CEOs of small firms have a high level of ownership since their desire for discretion is higher (Mace, 1979). This may influence the transformation of a firm positively or negatively. Prior research has been conducted on board interlocks and their influence on firm performance (Zona, Gomez-Mejia, & Withers, 2015). Board interlocks are where a person officially connected to one organization will be on the board of directors in another organization (Zona et al., 2015).

Since the board of directors will be serving in a rival firm their advice can sometimes be twisted which will be a challenge for the CEO (Cox Pahnke, McDonald, Wang, & Hallen, 2015; Katila et al., 2008). The advantage of board interlock is that when a resource-constrained firm interlocks with resource-rich firms then the performance shoots up (Casciaro & Piskorski, 2016).

2.2.1 The Magnitude of the Relationship Between the CEO and the Board Results in the Positive Transformation of a Firm

Boards may assist or challenge the CEO in many ways which form their first convergence point of corporate governance (Boyd, Haynes, & Zona, 2011). Assist or challenge is two sides of the same coin which impacts the relationship between the CEO and the board. Utilizing knowledge from the outside directors is a difficult task for the CEO due to the board’s limited time (Jay &

Jack, 1990; Mace, 1979).

When a firm establishes a relationship with another firm it brings along with it multiple types of information (Christine M et al., 2014). The spread of this information can have positive or negative effects on the firm (Christine M et al., 2014). Future research could be extended by examining how both the CEO and the board takes into this spread of this information. Ventures

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during their early stages of development are operating in an unclear environment with clouded organizational processes as well as systems (Garg, 2013). Therefore, investors and CEOs associate more during the beginning phase of a venture (Garg, 2013). To mitigate the risk factor associated with a venture, the board creates a professional structure, processes, and roles (Garg, 2013) which ultimately aid in the initial development of a bond between the CEO and the board.

2.2.2 The Role of External Alliances in the Relationship Between the CEO and the Board

Resource constraints are one of the risks associated with new ventures (Baker & Nelson, 2016).

Flourishing firms often experience a shortage of human, financial, or other resources (Volpe &

Biferali, 2008). Ventures may have resource constraints despite this they grow and flourish standing within their limitations (Baker & Nelson, 2016).

To overcome the resource constraint situations that a venture experiences while growing, a firm can develop an external alliance network which ultimately gives the venture access to the resources, that more established firms enjoy (Baum, Calabrese, & Silverman, 2000; Teece, 1992). An extensive literature discusses the advantages of establishing network ties that help in gaining complementary assets as well as the flow of learning that emanates from these external relationships (Baum et al., 2000). External alliances signify that the firm need not face challenges that a start-up without external alliances typically faces (Baum et al., 2000).

Incumbent firms experience routine rigidity during threat perception (Hannan & Freeman, 1977; Henderson & Clark, 1990; Levinthal, 1992). Routine rigidity is referred to as inertia in changing the organizational processes (Leonard-Barton, 1992; Nelson & Winter, 1982). Future research can be used to fill the gap to examine whether routine rigidity is a part of ventures and does it affect the relationship between the CEO and the board.

2.2.3 The Role of Board Monitoring in the Bond Between the CEO and the Board

Board monitoring is another aspect of the relationship between the CEO and the board of directors (Garg, 2013). According to the authors, monitoring is required because of the unstable nature of the venture as well as the change in markets (Garg, 2013). The author throws light on the monitoring function of the board as well as its implications for firm performance (Garg, 2013). Apart from monitoring functions, the board member can recruit, dismiss, and compensate senior management teams and try to act as a bridge between the decision-makers and stakeholders (Barry & Henry, 1985). They implement the process of making shares

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12 available for exchange on a public market (Barry & Henry, 1985). According to economists, the board of directors functions unitedly and has a combination of both insides as well as outside directors (Fama & Jensen, 1983). Occasionally when a firm establishes network ties with another firm, the problem may crop up (Fama & Jensen, 1983). To mitigate these issues, board members extend an invitation to members of vertically interdependent organizations (Litwak, 1968; Selznick, 1949).

2.2.4 The Role of Environmental Settings In the Tie-Up Between The CEO and the Board

When it comes to strategic decision-making by the board, environmental balance is of utmost importance (Duncan, 1972; Wiersema & Bantel, 1993). In stable environments, the application of existing strategies in the ventures is more important than the expansion of new strategies (Carpenter & Westphal, 2001). The author suggests that the director’s commitment to the boards of other companies that are in a similar environment is a major factor determining the director's commitment to strategy (Carpenter & Westphal, 2001). This commitment is referred to as strategically related ties which enable directors to interpret complex blend of processes required to transform the venture successfully (Barry & George, 1990; Craig & Gregory, 1991;

Gomez-Mejia, 1992). If the board of directors is involved in a firm that is in a different environment relative to the focal firm, then they get access to a broad range of viable strategic alternatives (Carpenter & Westphal, 2001).

2.2.5 The Importance of Organizational Learning for the Positive Link Between the CEO and the Board

Organizational learning plays a major role in facilitating theory and strategy in firms (Bingham

& Davis, 2012). It is through organizational learning that firms learn to adapt to circumstances as well as form external alliances and take part in experimental learning and bring about innovation (Argote, 2013). According to the author, to have a structured use of learning processes, a learning sequence is used (Abbott, 1990; Andrew & Marshall Scott, 1995;

Langley, 1999). Both the CEO and the board can use the learning sequence in entrepreneurial firms. Seeding and soloing are different learning sequences (Bingham & Davis, 2012). Seeding begins with learning from other’s experiences and through soloing firms the firms learn from their own actual experiences (Bingham & Davis, 2012).

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2.3 Analytical Methodology to Understand the Relation Between the CEO and the Board and Venture Growth

In this chapter, various hypotheses and ideas regarding firm growth and the relationship between the CEO and the Board have been presented. This research helped me to build my knowledge within the field of study. We have assembled a logical framework to understand the existing literature.

Throughout the literature, it is shown that firm growth is one of the most important decisions during the life cycle of an enterprise. Similarly, the relationship between the CEO and the Board is of utmost importance to guide a firm one pace forward. Table 2.1 shows different dimensions that will affect firm growth from the perspective of the relationship between the board and the CEO. The dimensions used in this framework are based on the literature review presented above.

Table 2.1:Dimensions that will affect firm growth from the perspective of the relationship between the Board and the CEO.

Sl no Dimensions Firm growth CEO-board relationship

1. Nature Heterogenous Interdependent

2. Orientation Firm performance Transformation of a firm 3. Strategy Different modes of firm

growth

CEO utilizing the expertise of Board

4. Operations Firm survival Relational pluralism as well as merger

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3 Research Design and Methodology

3.1 The Choice of the Methodology

In this section, I will describe and discuss the preferred methodology as well as the data collection process used in the master thesis. To obtain reliable results, a research design is crucial. Taking inspiration from (Yin, 2014), careful consideration is given when preparing for the choice of methodology. According to Yin, there are three assumptions to be followed when deciding the approach to research i.e., a) the influence of the research question b) the scope of the researcher in determining actual observable events c) Importance of contemporary events regarding the topic of interest.

Table 3.1:Different research methodologies based on Yin’s three conditions (Yin, 2014)

Method Form of the research

question

Requirement control of behavioral events

Focuses on

contemporary events?

Experiment How, why yes Yes

Survey Who, what, where

how many, how much

No Yes

Archival analysis Who, what, where how many, how much

No Yes/no

History How, why no no

Case Study How, why no Yes

Based on Table 3.1 (Yin, 2014), the case study design is the preferred methodology in this study process.

a. The nature of the research question

b. The question for my study begins with “how” the relationship between the Board and the CEO influences the firm growth.

c. The scope of the researcher in determining actual behavioral events: - There are some behavioral events connected to the field of study which is not in the control of the investigators. I, as a researcher, cannot shape the behavior of events or the actors involved in the study. The degree of control I have over the situational context is very less. For example, sustainable competitive advantage is an essential part of the performance of firms in the long run (Porter, 1980; Porter & Advantage, 1985).

According to Porter (1980) and Porter and Advantage (1985), 5 groups can influence

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the firm performance i.e., customers, competitors, suppliers, potential, and suppliers of substitute products.

d. Significance of contemporary events regarding the area of research:- With changes in the industry, firm mergers are a way to successfully influence the pricing of its products or services in the overall market estimation (Majumdar, Moussawi, Yaylacicegi, &

Economics, 2013). Mergers lead to firm performance by improving the economies of scale (Farrell & Shapiro, 1990; Stillman, 1983). In some situations, firms with specific resources merge with firms lacking those resources (Majumdar et al., 2013).

3.1.1 Qualitative Multiple Case Study Approach

In the thesis, a multiple case study research approach representing different interviewees from different organizations is applied given the limited proposition surrounding the research subject (Eisenhardt, Graebner, & Sonenshein, 2016). This research method is a fit to test the detailed knowledge about a topic and to examine how different parts of our research join to form a bigger picture of clarity (Langley & Abdallah, 2011). When there is some difference in the expected and measured data, multiple case study helps in transparency (Langley & Abdallah, 2011).

The case study design is apt when we formulate a research question with how, the topic of research is associated with the current developments of events, there are no regulations of event occurrences and the study subject and settings are inseparable (Yin, 2018). When formulating a research question with ‘how’, a case study is one of the research methodologies which is an elaborate analysis of a specific case (Yin, 2018). The benefit of case study methods is that it provides specific qualitative information (Yin, 2018). The case study process requires how and why analyses are made and the means of concluding (Yin, 2018). The outcome of this methodology is that it helps in developing working theory, defining, and evaluating prior studies about the subject and scope for future research studies (Yin, 2018). Case study research is most convenient for questions that ‘acknowledge in what conditions the event occurs’ as well as ‘the reason for the occurrence of the event’ (Yin, 2018). The disadvantage of a single case study is that the result cannot be applied to the general population (Yin, 2018). To overcome the disadvantage of the single case study method, multiple case-study methods are used.

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16 Semi-structured interviews with start-up firms, scaleup firms were the key process of data collection. Company interviewees have assured anonymity when meeting invitations via emails were sent.

As Yin (2018) noted, 5 leading principles guide research methodology. The first part explains the research question, the second part determines the narrower questions to answer your research question, the third one illustrates the unit of analysis, the fourth part specifies the choice of the research design as part of the research process, the fifth one describes the nature of the data collection (Yin, 2018).

3.1.2 Conceptual Model

The conceptual model established by (Kathleen, 1989) is the most useful for this study. This framework is handy when it comes to studying an area of research that is not clearly defined (Kathleen, 1989). The different activities conducted when implementing the framework are demonstrated in Figure 3.1.

Figure 3.1:Eisenhardt (1989) conceptual framework for inducting theory

I intended to use this framework to develop my case study research process. The framework does not encourage developing propositions after identifying prior literature works as it can obstruct the natural flow of the findings (Kathleen, 1989). The three conclusive phases of the framework correspond to opportunities for future work because developing a new hypothesis is not within the limits of this study research.

3.2 Studying the Subject Extensively

In the primary stages of the research, I planned to focus on the relationship between the CEO and the Board and the firm growth. Accordingly, a literature review on the specified topic was

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assembled. The literature review comprises the factors which influence the CEO-Board relationship and the firm growth along with an intricate explanation of different modes of firm growth. Gradually I realized that there are research gaps to be filled in understanding how the relationship between the CEO and the board influences firm growth. Moreover, the topic of firm growth is very broad, and covering all the topics of interest within a limited time would not be feasible. Here I come to the second stage of my research that is narrow down to few defined fields. In the process of narrowing down to few defined fields, reasons for acquisition were also explored.

After the second stage, it was essential to find the relevant papers corresponding to the narrowed down subject. The understanding that firm growth and the relationship development of the CEO and the board is one of the main decision-making processes of the firm during firm growth is vital for the study. Going back to the literature review, there exists a research gap regarding the influence of the relationship between the CEO and the board on the firm growth.

Accordingly, searching for appropriate literature and identifying gaps was an important process of my research journey.

Recognizing the above stages, my research approach was more towards how and why questions which guided me in developing my research question. When reading the relevant articles, the following questions cropped up in my mind. The first question was corresponding to the relationship-building process of the CEO-Board, the second question was related to the reasons for the acquisition. Connecting the relationship between the board and CEO for important strategic decision-making such as firm growth was a turning point in my study. This interest led me to the resulting research question which is:

How the relationship dynamics between the CEO-Board influence the making of strategic decisions like the firm growth?

Additionally, a key element in the field of firm growth is the study of the growth of small firms.

This study was important because all the firms for data analysis were small and gathering an idea of their growth helped me in my data collection process. A model for the growth of the small business has been laid out (Lewis & Churchill, 1983). As Churchill and Lewis noted, there are 5 stages for small venture growth. Figure 3.2 depicts the model.

Figure 3.2 Stages of an Enterprise growth(Lewis & Churchill, 1983)

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18 In the first stage, the venture takes effort to hold its place in the market without a proper arrangement set-up (Lewis & Churchill, 1983). At the survival stage, there is scope for business expansion and the entrepreneur looks for further alternatives to bring about the extra benefit (Lewis & Churchill, 1983). Success is the third of economic growth. In this stage, the entrepreneur attains desirable outcomes for the venture (Lewis & Churchill, 1983). At this juncture of take-off, the enterprise owners concentrate on the advancement of their firm with formal structure accessible and production in full swing (Lewis & Churchill, 1983). At the last stage, which is resource maturity, the enterprise primarily is regarded as a fully-fledged business with more attention paid to shaping a section of the market represented by its exclusive existence (Lewis & Churchill, 1983). This model became more thought-provoking during the period of data collection.

The last stage of my research is to investigate publications discussing the research question.

The relationship between the CEO-board and firm growth has not been considered much and was very difficult to search for. Thus, I am interested to research more.

3.2.1 Sub-Questions Developed As Part Of The Main Research Question.

The objective of studying the research question and sub-questions is that it helps us in mapping out a framework that recognizes appropriate knowledge about the research subject (Yin, 2014).

To avoid exploring irrelevant areas of research concerning our research topic, a main research question and study questions are required (Yin, 2014). Particularly, Yin (2014) suggests that the research process will not gain its logical possibility if not for the research questions and sub-questions.

When outlining the literature review into different sections, 2 sub-questions were developed to explain the main research question. In this section, the sub-questions are addressed as well as the reason for selecting those sub-questions are described. The 2 sub-questions are as follows:

A) What are the major reasons for inorganic growth, in particular the acquisition for different firms?

B) How does the board help the CEO in making decisions about firm growth?

As pointed out by Penrose, organic growth and growth by acquisition are two distinct strategic decision-making of the firm (Lockett et al., 2011). When the firm decides to choose a mode of growth for its expansion, it creates an impact on prospective organic growth (Lockett et al.,

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2011). I was eager to know about the reasons for acquisition assuming from extant literature that preferring one growth mode over another is an integral part of the strategic decision- making process of the firm and the element about the decision-making process involved, made me curious about the support provided by the board to the CEO during the making of strategic decisions like firm growth. This was the main justification in formulating ‘A’ and ‘B’.

3.2.2 Unit Of Analysis

I defined the unit of analysis for my research motivated by previous works (Baxter & Jack, 2008; Wilson, 2014; Yin, 2014). Returning to the research question: How the relationship dynamics between the CEO and the Board influences the firm growth. A clear picture of the theoretical framework started forming in my mind once I started collecting my data for analysis. This depiction was regarding the strategies for firm growth for all types of ventures and what the CEO and the board are trying to do to support their decisions about firm growth.

In this research, my unit of analysis is firm growth and the relationship between the board and the CEO. I also intended to include both start-ups and growth firms that were part of the acquisition process, considering most aspects of the firm growth, to understand the strategies for firm growth from different angles. This is to assess whether the stages of business growth of a firm are regulated relative to the relationship phases of CEO-Board along with evaluating the current literature. As is the case of mature firms, I wanted to understand the stable nature of the organization to facilitate growth and collaboration between the CEO and the board.

Nonetheless, due to COVID-19, I could not manage to get as many interviewees as I had in my data collection proposal.

3.2.3 Choice Of The Research Design

I designed my case study as a multiple case study employing semi-structured interviews. A case study is defined as a factual representation of present context not beyond empirical conditions specifically when the limit between the circumstances that form the setting for an event and a situation that is observed to happen is not clearly defined (Bass, Beecham, & Noll, 2018). Case study contributes to a methodical manner of data gathering in addition to interpreting the data collected along with addressing the information converted from data (Bass et al., 2018). That being the case when a researcher prefers case study methods over other methodology, he or she will have a huge advantage of having deeper knowledge about the research topic in addition to exploring the scope for future research (Verner, Sampson, Tosic, Bakar, & Kitchenham, 2009).

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20 Most research can be divided into three diverse groups i.e., exploratory, descriptive, and casual (Wilson, 2014)). There are different means by which case studies can be managed which are holistic study that places the spotlight on a single organization altogether and embedded study holds several units of analysis (Bass et al., 2018; Scholz & Tietje, 2002). According to Wilson (2014), exploratory research follows patterns, resemblances, consistency in experiences, and observations to conclude. This category of research is useful to explain a research topic with little or no extant literature to cite (Wilson, 2014). Accordingly, when there are insufficient prior works regarding the area of interest, exploratory research is a feasible alternative (Wilson, 2014). The research objective of this study is to develop an understanding of a specific topic.

To implement research concerning the research questions, very little published work is found on the relationship between the CEO and the Board influencing the firm growth. Therefore, an exploratory case study is performed to investigate the factors influencing firm growth and to investigate the change in dynamics of the relationship between the CEO and the board during the making of strategic decisions like firm growth.

Data reliability and data validation are discussed in the next section keeping in mind the subjective nature of the case study.

3.3 Data Reliability

Data reliability is defined as the extent to which you can trust the data (Wilson, 2010). The ensuing methods are practiced ensuring the finest reliability of data (Wilson, 2010):

A. Various sources of information: The essential unit of analysis is firm growth and the factors influencing the relationship between the CEO and the board. To gain data accuracy, 8 interviews with 8 different companies were conducted.

B. A case study directory: After the interviews were conducted, the data obtained from the interviews were organized systematically in many accessible ways. They were arranged in groups of cases and their importance.

C. Data confirmation: All the interviews were recorded with the consent of the interviewees. Even though the interview could be recorded, I took notes of some important points with the intention that it would be useful while transcribing the recorded data. The interview guide is presented in the appendix.

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3.4 Data Validity

Data validity is defined as how precisely the measurement of data can be conducted (Wilson, 2010). The research study consists of both internal and external validity. External validity refers to what degree the study results can be prescribed in another context whereas internal validity refers to what degree a study conducted by you can cause an effect on the outcome(Wilson, 2010). I am looking forward to analyzing the degree my study performs in both types of validity.

Before analyzing this part, I came across the term data triangulation (Yin, 2014) from Yin’s previous works. The purpose of data triangulation is to come up with multiple sources to confirm the data collected (a conclusion reached) (Yin, 2014). Data from existing articles on acquisition and organic growth was also explored to gather information on different modes of firm growth. Besides, data from existing web pages like proff.no and shifter.no was searched to know more about themes like CEO duality and communication link between the board and the CEO.

Apart from data triangulation, there are also various ways to enhance data validity (Mays &

Pope, 2000). They are:

1. Clear interpretation of data collection and analysis: This may be found in the following modules which describe the data collection and analysis part.

2. Spontaneity: When the researcher tries to determine the results, there occurs researcher bias. To avoid it, open-ended as well as semi-structured questions were asked to ensure that the interviewee could express his feelings freely during the interview. I was careful not to include the sensitive subject of inquiry in my interview guide and would only include follow-up questions if the interviewee comes forward with some points of interest.

3. Fair treatment of one’s work: This can be related to the data reliability measures and data triangulation as discussed earlier. It refers to applying different outlooks to avoid one’s own bias towards the research topic. I tried my level best to interview as many higher officials as I could to gain a better understanding of the research topic.

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4 Data Collection

I came up with this idea of thesis in the autumn of 2020 under the course ENT5100 Research Design. During my internship at TietoEVRY as part of the curriculum under the course ENT4460 – Corporate Entrepreneurship Project, I began thinking of firm growth as well as the relationship between the board and the CEO from a successful company perspective. After a while, this thought evoked speculation about the birth of a firm and its approach to develop a full-grown company. Academic assignments under the course ENT4400 – Corporate Innovation Strategies and Project Management also proved to be effective in increasing the knowledge regarding the fields of interest. Due to restrictions of COVID-19, all interviews were performed digitally. The first online interview with the CEO of a company called Robot Aviation was conducted on 15th February 2021. The interview affirmed the importance of a positive relationship between the board and the CEO during the making of strategic decisions like firm growth. Furthermore, prior studies and processing of research questions were accomplished between October 2020 and the middle of March 2021. Since it was difficult to get CEOs on board for an interview, I used to mention in my email the estimated reading time to read the mail to capture the attention of the CEOs and they were sent an overview of my research to entitle them with more awareness about the topic.

In some special cases, the interview guide was sent out in advance. Internet research proved to be an effective method of secondary data collection. Due to Covid-19, the university library was closed because of which I could not collect some books for reference. However, during October 2020, I read some books concerning data collection methods which helped me in my thesis preparation. A total of 8 interviews were conducted during February 2021 and March 2021 and data were analyzed in the middle of March 2021. Meanwhile, specific divisions of the thesis were made and written corresponding to the data collection process. Integration of the report took place in the last week of April 2021 and the beginning of May 2021.

Two classifications of sources of collecting information exist which are primary data and secondary data. This grouping is inspired by Yin’s data collection methods utilizing different sources i.e., from interviews, prior studies, and record or collection of article materials(Yin, 2014). The attributes and background in which the research design is laid out and discussed support multiple data collection methods such as interviews, literature review, and articles as discussed previously. Triangulation of data enhances data validation seeing that multiple

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sources of data collection are involved with comparison from more than one source of data analysis (Kathleen, 1989). Section 4.1 and 4.2 describe the data collection methods thoroughly.

4.1 Primary Data Collection

This research tested and practiced semi-structured interviews to gain a better understanding of the research topic. All the interviews took less than 30 min which was very effective from the interviewer and interviewee point of view. The interviewees were very relaxed and comfortable. Because of this fact, I as an interviewer could gain more useful information owing to the breezy nature of the interviewee.

The main objective of interviews is to grasp the knowledge and perception of the interviewee i.e., it helps in collecting in-depth information (Rowley, 2012). According to Rowley, an interviewee is willing to think and talk about new ideas during an interview process compared to other data collection methods (Rowley, 2012). Apart from the first two reasons, the third rationale behind choosing interviews is because the questions in the interview guide will be tailored to the needs of the research question (Rowley, 2012). In contrast, the questions raised to the interviewee ought to be remodeled to satisfy the participant and area of research (Rowley, 2012). This process enables us to explore deeper into the subject and identifies more themes concerning the research question. The above three reasons motivated me to choose the interview as the method for data collection.

There are three main processes for interviews which are preparing a layout for the interview, organizing the interview, and surveying the interview data (Rowley, 2012). While preparing the layout for the interview, a semi-structured approach is employed. During this process, the researcher assembles reasonable questions on the topic of interest, the assembling takes place in an interview guide, but the participant has a lot of freedom in how to put together the response (Bell, Bryman, & Harley, 2019). Additionally, along with the main questions covered in the interview guide, a few research questions were also added to provide a clear picture of the research topic (Appendix A).

Altogether, I have taken 8 interviews out of which two were conducted via Skype, five were conducted via Zoom and one was conducted through telephone. To check the accuracy and quality of source data, data triangulation is employed using multiple sources (Yin, 2014). The official website of the companies I interviewed and recent articles about the acquisition were also explored. My interview subjects were of the same roles yet their expertise in different

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24 industries enlightened my area of research on firm growth and the relationship between the CEO and the board.

All interviews were recorded with the permission of the participants. While conducting the interview, I made sure that the layout of the interview varies slightly in all cases, but I always stuck to some ice-breaking moments. This structure difference and ice-breaking moments are to ensure a free-flowing conversation for the interviewees. The main challenge was sticking to the interview schedule nevertheless I could end the sessions well before time. Talking about the ice-breaking stage, I tried to engage in an informative formal talk with my interviewees.

The talk involves about the Covid situations as well as general information about the company they are working in. Following the ice-breaking session, my first opening question would be

“What comes to your mind when you hear the word Firm growth”. I realized that this question encourages them to start thinking about the firm growth and they open a lot. It allowed the conversation to glide along with the interesting subject effortlessly. I felt the conversation was effortless because there was no interruption from either side. I motivated them to talk about their experiences more and at times asked for clarifications of details for a topic of importance.

The field of study follows multiple case designs with replication logic, that is the major findings from earlier research are valid for other recent research or subjects (Yin, 2014). There are two approaches to replication logic that is literal replication and theoretical replication (Yin, 2014).

Literal replication implies choosing interviewees that are likely to contribute identical results while theoretical replication implies choosing subjects that are likely to contribute dissimilar results (Yin, 2014). Table 4.1 shows the list of the interviewees.

Table 4.1 shows the list of interviewees.

SL No Date Company Name Role

1. 15.02.2021 Company A CEO

2. 22.02.2021 Company B CEO and the Chairman

3. 03.03.2021 Company C CEO

4. 06.03.2021 Company D CEO

5. 17.03.2021 Company E CEO

6. 17.03.2021 Company F CEO

7. 19.03.2021 Company G CEO

8. 22.03.2021 Company H CEO

Virtually, 8 interviews were organized with a total of 113 hours of video recordings and 12 minutes of a telephone conversation with 55 pages of transcript. I consider my primary source of data collection the most reliable ones.

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4.1.1 Interview Guidelines

In the preliminary stage of my interview guide, a pilot interview was set up in early March to review the questions in the list. The pilot interview helped gauge the flow of the interview and I have used the pilot interview to learn and adjust my interview guide. The pilot interview was with an employee who had years of working experience in start-ups and established companies.

The feedback from him and my supervisors helped me to structure my final interview guide:

(i) The interview guide should be structured in such a way that we should be able to find reasons behind interesting statements made by the participants. As a result, there should be more ‘Why’ questions.

(ii) While preparing an interview guide, make sure to always remember the research question. This strategy will ensure that we do not deviate from the research topic.

I learned from the pilot interview and the initial two interviews that the introductory session is of utmost importance. At first, the interviewer must form a rapport with the subject. This can be established by actively listening to the participant and asking appropriate questions when it is the interviewer’s turn to speak. Putting yourself in the shoes of the subject makes certain of a considerate conversation with the interviewee nonetheless the interviewer is confident about the learnings to be derived from the interviewee.

The first acquaintance with the interview subjects was made via the university email. Through the email, the subjects were given an overview of the research topic and a summary of what I would like to discuss about such as growth mode of firms, high-level management works regarding firm growth, their assumptions on firm growth which helped them to gain first-hand information on the area of research.

4.2 Secondary Data Collection

To have a better understanding of the latest news about firm growth and CEO-Board relationship, I spent considerable time exploring newspaper articles concerning major acquisitions and what CEO thinks of their boards and vice-versa. Shifter.no, Bloomberg Business, and MarketWatch were of great help during these times. I closely monitored the social media accounts of some companies to get the recent report on them. As Yin (2014) suggests, direct observation and physical artifacts due to the Covid situations were not possible.

I came up with the idea for this case study during my internship at TietoEVRY when I was involved in the completion of a project which required multiple case studies and we resorted

Board-CEO Dynamics Driving Growth of New Firms