From Founder Control to Fiduciary Duty: Rethinking Corporate Governance in Entrepreneurial Firms
DOI: https://doi.org/10.5281/zenodo.21704938
Dr. Kalika Patrai, Mr. Ankur Tayal, Dr. Shweta Bhatia, Dr. Anil
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Keywords:
corporate governance; entrepreneurial firms; fiduciary duty; founder control; dual-class shares; venture capital; startup governance; sunset provisions
Abstract:
The theory of corporate governance was developed to address a problem that entrepreneurial firms don't encounter. It is this separation of ownership from control that founder-controlled firms do not have; it is the tradition of agency costs that Berle and Means introduced back in the 1930s. But these companies have governance faults that are unique and acute, targeted at the late-private phase when resources mobilized are substantial, investors are diverse, and governance is more akin to a small private company. This paper shows that the governance problem in entrepreneurial firms is not due to an excess or deficiency of founder control per se, but to the mistiming of the shift between (two) governance regimes. We theorize on the concept of fiduciary gap, which is the gap between monitoring needs driven by the size and external value of a firm and the enforceable accountability that is demanded against those controlling the firm, and place it in a Governance Regime Transition (GRT) framework that encompasses four regimes, from founder to public. Seven propositions are formed. We explain why fiduciary doctrine is a structurally weak remedy for filling the vacuum in private companies: the duty of care is negated by the business judgment rule, the duty of loyalty is a somewhat intangible obligation for which only litigation is a remedy (and which illiquid minority shareholders are not likely to be able to litigate), and preferred-common conflicts leave the directors with irreducibly conflicted duties. The corrective is then ex ante institutional design and not doctrinal reform, and we set out calibrated instruments organised by transition trigger. In this paper, no invented statistics are reported because they would need to be collected from the firm; therefore, a simulation harness and an estimation template with placeholder notation are provided.