Effects of agency risks and procedural justice on board processes in venture capital-backed firms

Abstract

This paper builds a model of the effects of agency risk and procedural justice in the boards of directors of venture capital-backed firms. Such boards are unique in that they consist of managers and outside owners with significant power and incentive to be highly involved in venture governance. The authors integrate agency theory and procedural justice perspectives to develop propositions regarding the effects of agency risk and board processes on the responses to poor performance and conflicts of interest. This integrated perspective suggests that factors that increase perceived agency risks will increase outsiders' tendency to focus efforts on monitoring and controlling board decisions and their propensity to resort to formal means to resolve conflicts. However, the authors suggest that through their effects on trust and positive attributions, fair procedures and interactions will reduce these tendencies. A discussion of the practical and theoretical implications of the proposed model concludes the paper.