The board of directors and firm innovation

Resumen

Considering the role that the board of directors can play when a firm adopts strategic decisions on topics such as innovation, in this doctoral thesis we analyse the role of this governing body as a determinant of firm innovation and as a moderator of the relation between firm innovation and value. For this purpose, we perform a thorough review of the prior literature on boards of directors and innovation in order to identify possible research questions that have not yet been resolved and to propose objectives and hypotheses to be tested. In the Introduction section, we contextualise the topics to be analysed and present the main concepts and goals of the study. In Chapter 1, the results of the literature review are integrated into a meta-analysis, considering the board characteristics that have most frequently been used in prior studies. We group such characteristics under two headings: structural diversity, that is, those that distinguish one board from another, such as size, composition (internal, external and independent directors), board equity, accumulation of positions between the chairman of the board and the CEO (duality) and meeting frequency; and demographic diversity, that is, individual characteristics that differ from one director to another (gender, social capital, tenure and age). The different types of innovation are also grouped as either inputs (resources and incentives allocated to funding innovation tasks) or outputs of such innovation activities (new products, processes, patents, patent citations, etc.). This allows us to establish whether different elements of the board can affect a firm’s innovation, depending on the type of innovation analysed (inputs or outputs). The results of the meta-analysis suggest that board structural diversity is positively associated with innovation outputs (except in the case of board equity, for which the association is negative). Between structural diversity and innovation inputs, we find two associations: for board size a negative one, and for duality a positive one. For demographic diversity and inputs, a positive association between gender and social capital is found, and for demographic diversity and outputs a negative one for tenure. In Chapter 2, we study the effect of the board of directors on firm innovation in the Spanish context, and specifically how board independence influences innovation in a sample of 124 Spanish firms over the period 2008-2019. Considering that board independence is one of the recommendations that is most frequently found in codes of good governance and that the prior meta-analysis showed that board independence is one of the variables that the literature has most often related to innovation, we decided to delve into this topic. Our aim was to analyse if being an independent director is a sufficient condition for determining innovation in a firm (measured as the number of patents) or if the diversity at an individual level of each independent director (in terms of gender and nationality diversity) can help explain the effect of board independence on firm innovation. A negative binomial analysis of panel data leads to the conclusion that independent directors may have a negative effect on a firm’s innovation. However, when there are high levels of gender and nationality diversity among such independent directors, this negative effect decreases. In other words, it is not sufficient for a director to be independent to promote innovation; there must also be a set of unique characteristics provided by each individual such as their personal relations, experience and approach to problems. In Chapter 3, we consider whether the board of directors, in addition to exerting a direct effect on innovation, can also play a moderating role in the relation between firm innovation and performance. Specifically, we test whether the number of interlocking directors moderates the relation between research and development (R&D) investments and firm value, using a data panel of 106 Spanish companies (over the period 2008-2019). The results of the Generalised Method of the Moments (GMM) performed lead to the conclusion that the existence of a larger number of interlocking directors in a firm negatively moderates the positive relation between R&D investments and firm value. That is, a large number of interlocking directors might limit the board’s capacity for providing effective advice on topics related to R&D investments. Finally, some conclusions and general implications of this doctoral thesis are presented, as well as avenues for future research. Also, Appendix offer a summary of the literature review covering articles of an empirical nature that somehow (directly, or through moderation or mediation) relate the board of directors to firm innovation (inputs or outputs) over a period of more than three decades.