The Founder´s Choice between Democracy and Autocracy in Corporate Governance

The paper presents a new model of founder´s choice between democracy and autocracy in corporate governance and point out that there is a life-cycle effect on the choice of governance mode. At the start-up period, the autocracy mode is more efficiency. However, autocracy requires the founder being as the CEO to have sufficient own capitals. If external finance is needed, the founder would respond for higher capital cost as compensation for the manager´s control benefit rents behavior and the control power loss of minority shareholders. Therefore, the capability of entrepreneur should be greater than the average managerial level in the professional manager market and the expected return of the “project” should be higher than the average level of the market as well. It is concluded that own funds and the founder´s capability are substitutes.