Change in the outside directors on the board affects strategy and performance of family Small and medium enterprise (SME)

We selected a sample of 187 family-controlled, small- and medium-sized Italian companies and gathered financial information about them. Then, we collected data on the strategic change and the recruitment of members to the boards of these family-owned firms. First of all, through multiple regression analysis of the data collected, we demonstrated that recruitment of new outside directors (in substitution or addition) onto the board is positively associated with strategic change. Family SMEs, which facilitate change in corporate strategy through changes to the set of outsiders on their boards, are controlled by family owner-managers who select board members in response to the specific strategic requirements of their firms. Successively, we analysed the financial performances which are associated with the recruitment of outsiders to the boards of the SMEs in the sample and, in this way, we found that the simple presence of outsiders is not sufficient to increase the firm’s financial performance since the firms which achieve the best results are those which are the most dynamic in making changes to the set of outsiders on their boards. Firms which choose outsiders to facilitate change in corporate strategy have greater capability to address changes in their environment and meet the challenges therein. In conclusion, from a dynamic perspective, addition/substitution of outsiders to boards can move the SMEs in the required direction, toward an efficient response to dynamic market conditions and, therefore, towards a more successful performance. Key words: Strategy, governance, addition/substitution of outsiders