SBANC
Newsletter
October
3, 2006
Issue
441-2006
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QUOTE
"Financial
education needs to become a part of our national curriculum
and scoring systems so that it’s not just the rich kids
that learn about money.. it’s all of us."
-- David
Bach
|
FEATURE
PAPER
Board
Size and Firm Performance: The Case of Small Firms
The
following paper was presented at the 2006 Allied Academies Conference.
It was written by Sharon K. Lee of Western New England College
and Greg Filbeck of the University of Toledo.
Abstract
Existing
literature discusses the inefficiencies in the monitoring role
of the board of directors
when the membership is too large. Several studies have found an
inverse relationship between
board size and firm performance in large firms. Given the nature
of small firms, this relationship
may not be present. This relationship had not been tested in small
U. S. firms. We also find an
inverse relationship between board size and firm performance in
small firms.
Introduction
In the aftermath of Enron Corporation?s collapse, the board of
directors and the role played
by its members have come under great scrutiny, bringing on the
Sarbanes-Oxley Act of 2002, and
also proposals by the New York Stock Exchange (NYSE). Reforms suggested
by the Sarbanes-
Oxley Act are still in the process of being formally translated
into rules by the Securities and
Exchange Commission (SEC).
With the increase in the perceived risk and responsibilities
of serving on a corporate board,
there appears to be a decrease in the sizes of boards. Several
studies have examined the relationship
between the size of the board of directors, and firm value
and performance [Bhagat and Black (1996;
Yermack (1996); Eisenberg et al. (1998)]. Is board size an
important determinant of the board's
quality of monitoring and decision-making? If so, what is the
effect of these inefficiencies on the
profitability and value of the firm? Yermack (1996) and Eisenberg
et al.(1998) both conclude that
there exists an inverse relationship between board size and
firm value. In a discussion on corporate
governance, Lipton and Lorsch (1992) state that larger groups
or boards, are less efficient, in that
individuals are apt to be less open in corporate policy discussions.
People tend to be more reserved
and polite in larger groups. This type of behavior by board
members reduces the effectiveness of
their monitoring role of management. Jensen (1993) agrees with
this point, when boards get
beyond seven or eight people they are less likely to function
effectively and are easier for the CEO
to control. As pointed out by Monks and Minow (1995), in many
corporate restructurings (after
successful tender offers), the boards of directors were reduced
in number.
Yermack (1996), using a sample of large firms taken
from Forbes magazine?s rankings of
the 500 largest U.S. public corporations between 1984 and 1991,
finds an inverse relation between
firm value and the size of the board of directors. Most all
of the boards in his sample had between
six and 24 members on the board. The mean number of directors
on any one board was 12 in his
sample. The largest loss in firm value appeared to be when
there were changes in the board between
six and 12 members. This change in value was approximately
equal to that when boards increased
from 12 to 24 members. Yermack?s findings hold when controls
for variables such as company size
and board stock ownership were made. The examination of valuation
effects of significant changes
in board size would provide more evidence on the relationship
between board size and firm
valuation and performance. Yermack examines abnormal stock
returns of six firms that
significantly decreased board size and four firms that significantly
increased board size, and
concludes that investors react positively to decreases in
board size, and negatively to increases in
board size.
In a similar examination, except for size and home
country of the sample firms, Eisenberg
et. al. studies the board-size effect in a sample of 879
Finnish firms. Their sample consisted of mean
and median board sizes of three and four members, respectively.
These sample firms had mean and
median assets of about $800,000 and $7 million, respectively.
Controlling for variables such as
industry, age of firm, and board stock ownership, they
find that board size is inversely related to the
firm's performance, as measured by an industry-adjusted
return on assets. Eisenberg et. al. state that
small firms may lack the same degree of separation of
ownership and management that play a
central role in the explanations of the effect. However,
their findings are consistent with Yermack
(1996), of an inverse correlation between board size
and firm performance.
This study
is unique from existing studies in several ways: 1) the effect
of board size on
firm profitability is tested, using small U.S. firms,
unlike Eisenberg et al. (1998) that uses small
Finnish firms, and 2) the sample includes the financial
data from 10-K reports filed either in March
2000, or June 2000. Gilson and Roe (1993) and Roe (1994)
point out that the extent of the board's
role in the monitoring of management varies by country.
The hypothesis that large boards are
ineffective in their monitoring role due to communication
and control difficulties, has not been
tested fully on small U.S. firms. The nature of the
agency relationships present in small firms can
be very different in that managers may have strong,
vested interests, both financial and emotional,
in the performance of the firm. This examination of
small firms provides further evidence on this
agency-related issue, by comparing the possible relation
between board size and firm value and
profitability in more recent samples of small U.S.
firms vs. large U.S. firms.
Read the Entire Paper...
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CONFERENCES
SMA
|
| Who: |
Society
for Marketing Advances
|
| What: |
2006
Conference
|
| Where: |
Gaylord Opryland Resort and Convention
Center in Nashville, Tennessee, USA |
| When: |
November 1-4, 2006 |
|
|
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DMEF
|
| Who: |
Direct
Marketing Educational Foundation
|
| What: |
Conference
3rd Annual Educators' Direct Marketing Symposium
|
| Where: |
Villanova School of Business |
| When: |
November 3, 2006 |
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AACSB
|
| Who: |
AACSB Communications
|
| What: |
Lessons for Aspiring Deans Seminar
|
| Where: |
North Carolina, USA |
| When: |
December 9-10, 2006 |
|
|
|
Unite
for Sight
|
| Who: |
Unite for
Sight
|
| What: |
Fourth Annual International Health
Conference
|
| Where: |
Stanford University School of Medicine,
Palo Alto, California, USA |
| When: |
April 14-15, 2007 |
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MEI
|
| Who: |
MEI
|
| What: |
The
3rd International Symposium on Management, Engineering
and Informatics
|
| Where: |
Orlando, Florida, USA |
| When: |
July 8-11, 2007 |
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CALLS FOR PAPERS
WDSI
|
| Who: |
Western
Decision Sciences Institute
|
| What: |
2007
WDSI Annual Meeting
|
| Where: |
The
Inverness Hotel and Conference Center in Englewood,
Colorado |
| When: |
April
3-7, 2007 |
Submission
Deadline:
October 15, 2006
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SSC
|
| Who: |
Social
Sciences Conference
|
| What: |
Second International Conference on
Interdisplinary Social Sciences
|
| Where: |
University of Granada, Spain |
| When: |
July 10-13, 2007 |
Submission
Deadline:
October 22, 2006
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AIMS
|
| Who: |
AIMS4
|
| What: |
Fourth AIMS International Conference
on Management
|
| Where: |
Indian Institute of Management (IIM)
Indore, India |
| When: |
December 28-31, 2006 |
Submission
Deadline:
October 27, 2006
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|
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ASBBS
|
| Who: |
American Society of Business and Behavioral
Sciences |
| What: |
14h
Annual Meeting of the American Society of Business
and
Behavioral Sciences
|
| Where: |
Imperial
Palace Hotel and Casino, Las Vegas, Nevada |
| When: |
February 22-25, 2007 |
Submission
Deadline:
November 1, 2006
|
|
|
|
HIC
|
| Who: |
Hawaii International Conference |
| What: |
7th
Annual Hawaii International Conference on Business
|
| Where: |
Waikiki
Beach Marriott Resort & Spa, Honolulu Hawaii, USA |
| When: |
May 24-27, 2007 |
Submission
Deadline:
January 19, 2007
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TIP
OF THE WEEK
Pricing
Pricing the product or service is a critical consideration for
the small business. One approach is to value the products at what
the small businessperson believes they are worth to the market.
Most small businesses charge a premium for their products or services.
However as a general rule the higher the price charged, the faster
competitors will challenge the small business.
One method for a small business with specific products that are
comparable to other products in the market is a cost-plus
pricing method where the firm determines its costs and then adds onto that
cost some level of profit it determines to be appropriate. This
method can be difficult to implement effectively. The method requires
that the small business initially determine what the total cost
is for a particular product (this is the product breakeven
point after which the firm makes a profit on that product). This breakeven
point is referred to as your pricing floor since you will not typically
want to price a product at a loss. In calculating the floor cost
of the product, estimated cost of marketing and an administrative
overhead allocation will need to be included. The estimated marketing
cost might change as the marketing plan develops. As a result,
the small businessperson would need to go through the pricing process
several times as the marketing plan is refined.
Occasionally, the small business owner might choose to have a product
that is referred to a loss leader. In other words, the business
may sell something at a non-operating loss to patronize the business.
The small business owner should not employ loss leaders until the
business has developed some substantial momentum. The small business
owner needs to get the firm on solid ground before employing tactics
that take considerable skill and have high risk associated with
them.
In determining the cost of the good, the small business owner should
avoid the time consuming nature of making detailed calculations
for every product, especially if the business has a wide product
selection. Instead, the small business owner should place products
in reasonable categories that balance the need for detailed pricing
as compared to managing an ever expanding database of information.
For example, if Office Lots has two desk chairs that differ only
in the shape of the back of the chair, there may technically be
a one to five dollar difference in the price of the products if
they were bought new. But Office Lots has limited personnel and
the need to manage a database of hundreds of products may be too
demanding on the firm's time. On the other hand, major airlines
have the slack resources and the technological ability to manage
a system where every person on the plane may pay a different price
depending on when the ticket was purchased, predicted occupancy
of the place, and actual filled capacity at the time of the purchase.
A small businessperson generally will not have that level of sophistication,
nor is it necessary for an effective pricing policy. Therefore,
the focus should be on having a data system that generates information
that is useful and manageable.
The cost information is the foundation to determine cost-plus pricing;
the small businessperson adds the desired percentage profit to
the cost. Small business can seek a profit of 10, 15, 20, 25, or
even 100 percent or more to add to the cost. Part of the desired
profit margin will be determined by how competitors price their
products. There will be a comparison effect as consumers evaluate
different firms' products and make decisions based on an internal
cost/benefit calculation. For example, prices at a small retail
clothing store might be higher than at a large mall store, but
consumers might consider the personalized service to be worth that
premium. Alternatively, a business might be able to charge a premium
if it has an image that consumers believe to be valuable. However,
if another similar clothing store opens down the street and has
similar clothing lines but priced about 15 percent less, then the
higher-priced business will probably have some difficulty. Significant
deviation between a business's pricing and that of its competitors
will have to be justified internally and will have to have merit
with customers. The small businessperson needs to keep abreast
of the competition and their pricing to be able to make such judgments.
Pricing a service is a bit more complex than pricing a product.
A product has a potential price floor based on costs, whereas offering
a service such as counseling, financial advising, or interior decorating
has only time as the base operational cost. There will still be
overhead expense (rent, utilities, etc.); however, the principal
value inputs are the small businessperson's education and experience,
which are difficult to establish a cost. In the case of services,
entrepreneurs are encouraged to closely examine the competitors'
pricing. These prices can be critical information in determining
how to value a service.
The small businessperson providing a service should also recognize
that pricing is a valuable tool to balance customer flow with the
available time. Some price-sensitive customers will make decisions
based solely upon price; therefore, as the price goes down, customer
flow goes up, and vice versa. After being in business for a while,
a small businessperson may find the business has too many low-margin
customers and cannot provide customers the level of service they
would like. As the customer base increases, a business often needs
to raise its prices to limit the customers coming in to a level
that can be adequately serviced and that generates profits.
In establishing the pricing, the small businessperson should remember
several caveats. Typically, a small business starting out will
need to offer an even greater value for the money charged in order
to build a customer base. Once the business has developed a positive
reputation, the value offered to the customer can be changed to
provide a bit more financial benefit to the company. Recall that
individual consumers are generally unwilling to change suppliers
of their goods and services. As the business grows, the small businessperson
can shift from a cost-plus type of pricing to one that is based
more upon what market will allow.
A second caveat applies to the actual price charged. Small increments
of money should be avoided regardless of the exact percentage of
margin desired. Thus, rather than charge $1.01 for a low-cost item,
$0.99 would be a more attractive pricing. The two cents difference
makes a reasonably large difference in appeal to customers. Similarly,
when prices are over $1,000 the small businessperson should avoid
using cents in the price.
Finally, the small business owner will have to determine if a quantity
discount should be offered. Much of this decision is based on the
nature of the business. For example, a retailer typically does
not sell in large enough quantity to be concerned with such issues.
However, Office Lots found such pricing to be beneficial to help
build strong relationships with key wholesalers who bought large
quantities of furniture.
| Charles
E. Bamford and Garry D. Bruton. Small
Business Management: A Framework for Success. South-Western,
Thomson Corporation. 2006. Pages 215 & 216. |
ANNOUNCEMENTS
SBANC to Launch
New Website!
The Small Business
Advancement National Center will launch their newly redesigned
website by the end of the week. The staff has been working
long and hard to bring a more convient interface for the users
of the SBANC website. We hope the new design will be more pleasant
and easier to use.
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The
SBANC Newsletter is provided as a service to the members of our
affiliates: Academy of Collegiate Marketing Educators (ACME), Association
for Small Business & Entrepreneurship (ASBE), Federation of
Business Disciplines (FBD), International Council for Small Business
(ICSB), Institute for Supply Management (ISM), The International
Small Business Congress (ISBC), Marketing Management Association
(MMA), Small Business Administration (SBA), Service Corps of Retired
Executives (SCORE), Small Business Institute (SBI), Society for
Marketing Advances (SMA), United States Association for Small Business & Entrepreneurship
(USASBE), U.S. Department of Veterans Affairs (VA).. If you are
interested in membership or would like further information on one
of our affiliates, please see our web site at http://www.sbaer.uca.edu
SBANC STAFF
Main Office Phone: (501) 450-5300
Dr.
Don B. Bradley III, Executive Director of SBANC & Professor
of Marketing;
Direct Phone: (501) 450-5345
Brandon
Tabor, Development Intern
Garion
McCoy, Development Intern
Casey
Thomson, Development Intern
To subscribe or unsubscribe to the
SBANC Newsletter, please E-mail SBANC at sbanc@uca.edu
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