Academic journal article Journal of Business Strategies

Boards as Resource Providers and Monitors for Research and Development

Academic journal article Journal of Business Strategies

Boards as Resource Providers and Monitors for Research and Development

Article excerpt

ABSTRACT

Innovation is essential for every organization. Yet the relationship between boards and innovation remains unclear. We argue that boards not only monitor, but also provide resources, and innovations require both proper levels of resources (skills) from the board, and appropriate forms of control. In this study, we integrate resource-dependence and agency perspectives to examine how a board's knowledge and skills (board diversity) and a board's preference for behavior based controls (board composition) influence the board's ability to provide resources and design controls, which in turn affect the level of research and development intensity in the firm. Hypotheses are tested using a panel data set of firms in research intensive industries.

INTRODUCTION

"Every organization needs one core competence, innovation" (Drucker, 1995)

Certainly, most top managers would agree that innovation is essential for the survival of business, especially in these times of technological and global turbulence. Despite this recognition, though, few firms are able to sustain innovation. Each decade seems to bring renewed recognition that inertia drives out innovation in many established firms (Christensen, 1997; Cooper and Schendel, 1976; Miller, 1990). Not surprisingly, CEOs and their top management bear some blame for the problem. Under the pressure of meeting quarterly forecasts, CEOs claim to have little time to formulate and implement long-range growth initiatives.

While there may be a natural excess of managerial myopia within the executive team, we suggest here that part of the cause for near-sighted management may lie with the board of directors. Research has shown that boards can influence major corporate decisions such as strategic changes (Goodstein and Boeker, 1991; Golden and Zajac, 2001), diversification (Amihud and Lev, 1981; Lane, Cannella and Lubatkin, 1998), shifts in R&D intensity (Baysinger and Hoskisson, 1989; Hill and Snell, 1988), restructuring (Goodstein, Gautam, and Boeker, 1994; Johnson, Hoskisson, and Hitt, 1993), and corporate entrepreneurship (Zahra, 1996, 2000). Clearly, boards can influence some major change episodes. Yet to date, research has not provided consistent explanations on how boards affect varied aspects of firm innovativeness. For example, Goodstein, Gautam, and Boeker (1994) found that board diversity may hinder the board's ability to initiate strategic change, despite scholars' arguments on how board diversity promotes a wider range of solutions and decision criteria for strategic decisions and encourages strategic change (Eisenhardt & Bourgeois, 1988; Kosnik, 1990). Another example of inconsistency occurs in investigations of the relationship between outside directors and innovation. Arguments based on agency theory suggest that independent outsiders better align the strategic orientation to stockholders' interest, encouraging more risk-taking and increases in R&D spending (Kosnik, 1990). However, a number of studies found that the outside director ratio was negatively related to R&D investment (Baysinger, Kosnik & Turk, 1991; Hill and Snell, 1988), suggesting that insiders better safeguard innovation. We believe that the inconsistencies in our understanding of the relationship between boards and innovation can be traced to three causes.

First, the board's role is not one dimensional. Boards of directors play multiple roles, which include monitoring management and providing resources (Zahra & Pearce, 1989; Adams, Hermalin & Weisbach, 2010). These two roles sometimes are complementary, but at other times may be conflicting. Past research tended to look at each role using differing theoretical lenses. Agency theory has mainly focused on the control role, while resource-dependence theory usually considers the resource role. However, controls and resources are each related to firm innovation. A study combining these two diverse perspectives will provide a clearer picture of how boards influence firm innovation. …

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