The Board Paradox in SMEs: Corporate Governance as a Dynamic Configuration of Formal and Informal Mechanisms

This paper examines how corporate governance should be conceptualized in small and medium-sized enterprises (SMEs), where formal boards are often absent or play only limited roles. This creates a central board paradox: governance research remains largely board-centred despite the limited relevance of boards in many SMEs. Building on insights from SME heterogeneity and organizational life-cycle research, the paper reconceptualizes governance as a dynamic configuration of formal and informal mechanisms that structure decision-making and accountability. Formal mechanisms include boards, management teams, and reporting systems; informal mechanisms encompass ownership arrangements, relational governance, and founder authority. This perspective shifts the analytical focus from governance structures to governance functions, and accommodates the diversity of SME organizational forms as well as the transitions they undergo over time. The paper contributes by challenging board-centred and agency-dominant approaches and introducing a configurational and dynamic framework that better captures the variety and evolution of governance in SMEs. It also provides a conceptual foundation for future empirical research that moves beyond board-based proxies.