Ilkka Gramén, Jari Nyberg, Ilkka Kauranen  
(Department of Industrial Engineering and Management, School of Science, Aalto University, Finland)

Abstract: Very few small and medium-sized companies use external members on their corporate boards. An external member is an individual who does not work in the company and who is not financially dependent on the company. We postulate that external board members are an unused resource in small and medium sized companies, but it is not clear how this resource could be used to its full potential. Thus, the objective of this study is to increase understanding of using external board members in small and medium-sized companies.

The study is based on survey responses from 290 small and medium sized companies in Finland. As a result of our study, many positive effects of having an external member in the corporate board could be identified. External board members broaden the views of the company management. External members help the company to get access to a broader network of stakeholders. Having an external member in the board induces more professional practices to the management of the company. This leads to better performance of the board. Boards with an external member more often than other boards had had prescheduled meetings, had received in advance agendas of the meetings and had held meetings dedicated purely to strategic planning. Boards with an external member had especially contributed by supporting top management and by participating in strategy formulation. All in all, board work was experienced to be more successful in companies with external board members.

Key words: external board member; corporate board; shareholder

JEL codes: M100