A Contingency Model of Boards of Directors and Firm Innovation: The Moderating Role of Firm Size
| Published date | 01 September 2013 |
| DOI | http://doi.org/10.1111/j.1467-8551.2011.00805.x |
| Date | 01 September 2013 |
| Author | Alessandro Minichilli,Fabio Zona,Alessandro Zattoni |
A Contingency Model of Boards of
Directors and Firm Innovation: The
Moderating Role of Firm Size
Fabio Zona,1Alessandro Zattoni2and Alessandro Minichilli1
1Department of Management and Technology, Bocconi University, Milan, Italy, and 2Parthenope University
and SDA Bocconi School of Management
Corresponding author email: fabio.zona@unibocconi.it
This study asserts that the effects of board characteristics on firm innovation need to
be evaluated with reference to contingency variables. A literature review suggests that
relatively few studies adopt a contingency view when examining the outcomes of boards
of directors. This study examines the influence on firm innovation of characteristics such
as board size, outsider ratio and board diversity, and suggests that their influence is
contingent upon firm size. The model is tested on a sample of Italian companies and finds
support for the contingency hypothesis. This study advances research on boards of
directors by emphasizing the importance of context.
Introduction
Firm innovation is the adoption of an idea or
behaviour that is new to the adopting organiza-
tion (Daft, 1978; Damanpour and Evan, 1984).
Firm innovation refers to a company’s commit-
ment to creating and introducing products, proc-
esses and organizational systems (Covin and
Slevin, 1991). Innovation is a key antecedent of
firm success in current, modern economies (Covin
and Slevin, 1991; Kor, 2006; Lumpkin and Dess,
1996; Stopford and Baden-Fuller, 1994). By
studying antecedents of firm innovation, research-
ers explore key conditions for organizational
success.
In the field of corporate governance, the board
of directors has long been considered a key ante-
cedent of investments in innovation. Most studies
on boards draw from agency theory (Daily,
Dalton and Cannella, 2003), which emphasizes
how self-serving executives reduce investments in
research and development (R&D) at the share-
holders’ expense (Lee and O’Neill, 2003). Specifi-
cally, because of the risk profile and the long time
horizon of innovation (Lee and O’Neill, 2003),
decisions on firm innovation are vulnerable to
managerial opportunism. Several facts contribute
to this issue.
First, innovation initiatives are highly risky:
fewer than 20% of all new product introductions
succeed (Crawford, 1987). R&D spending is also
risky because it may not result in any pay-off (Lee
and O’Neill, 2003, p. 214). Under an agency
framework, executives are considered to be risk
averse. Unlike shareholders, who can diversify
their investments across multiple firms, executives
bear the full risk of their employment. Therefore,
risk-averse executives are likely to make invest-
ments in innovation below the level preferred by
their risk-neutral shareholders, creating an agency
problem (Walsh and Seward, 1990).
Second, the benefits from innovation initiatives
emerge only in the long run (Lee and O’Neill,
2003; Lippman and Rumelt, 1982). Self-serving
executives are inclined to enhance short-term
results at the expense of long-term outcomes
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British Journal of Management, Vol. 24, 299–315 (2013)
DOI: 10.1111/j.1467-8551.2011.00805.x
© 2012 The Author(s)
British Journal of Management © 2012 British Academy of Management. Published by John Wiley & Sons Ltd,
9600 Garsington Road, Oxford OX4 2DQ, UK and 350 Main Street, Malden, MA, 02148, USA.
because the latter may materialize beyond the
executives’ tenure with the firm.
These two arguments lead to the problem of
under-investment (relative to shareholders’ pref-
erences) in innovation initiatives. Given the
vulnerability of firm innovation to managerial
opportunism (Lee and O’Neill, 2003), agency
theory calls for strong and independent boards,
which can monitor executives to minimize this
problem (Baysinger, Kosnik and Turk, 1991; Hill
and Snell, 1988; Hoskisson and Hitt, 1988;
Lippman and Rumelt, 1982).
Notwithstanding the strengths of these theoreti-
cal arguments, ‘a number of empirical studies indi-
cate lack of support for the agency perspective
predictions about the relationship between
board monitoring and R&S spending/innovation’
(Kor, 2006, p. 1085). For example, some studies
(Baysinger, Kosnik and Turk, 1991; Hill and Snell,
1988) report a positive relationship between the
ratio of inside directors and R&D expenditure per
employee; other studies report no relationship
between the ratio of outsiders on the board and
firm innovation (Hoskisson et al., 2002; Kor,
2006).
Recent research on boards has identified the
contingency approach as a valuable perspective
to expand the understanding of boards and to
resolve previous inconclusive results (Boyd,
Haynes and Zona, 2011). This view proves to be
particularly valuable when studying firm innova-
tion, because recent publications have shown
that firm innovation is significantly affected by
the key contingency factor of organizational
size. Damanpour (2010) shows that firm innova-
tion is facilitated in larger corporations. These
organizations have the necessary financial and
technical capabilities, economies of scope to
spread the risk of failure and absorb the costs
of innovation, the ability to establish and main-
tain scientific facilities, the resources to hire
professional and skilled workers in diverse
disciplines, and the ability to raise capital and
market innovations (Damanpour, 2010, p. 998).
Another study (Wischnevsky, Damanpour and
Méndez, 2010) has examined the influence of
environmental factors on corporate change,
emphasizing the valuable contribution that the
adoption of a contingency view may have on
understanding antecedents of firm innovation.
Overall, these studies suggest that understanding
the antecedents of firm innovation requires
consideration of the differing conditions (i.e.
contingencies) under which executives pursue
innovation initiatives.
In this paper, we posit that a structural contin-
gency approach (Burns and Stalker, 1961; Law-
rence and Lorsch, 1967) and the related analysis
of moderating effects provide an appropriate per-
spective to examine how boards affect corporate
outcomes. In particular, we examine how organi-
zational size (Child, 1975; Damanpour, 2010;
Hickson, Pugh and Pheysey, 1969) moderates the
relationship between board characteristics and
firm innovation.
Specifically, this study explores the effects of
three board characteristics (board size, board
diversity and outsider ratio) on firm innovation,
and tests hypotheses on a sample of Italian indus-
trial companies. The empirical results support our
proposition and show how the relationship
between board characteristics and corporate
innovation is moderated by firm size.
This study makes several contributions. First, it
shows how the relationship between board char-
acteristics and firm innovation changes for differ-
ently sized firms. Therefore, it suggests that the
impact of board features on organizational out-
comes needs to be understood in the context of
firm-specific characteristics. That is, a ‘contin-
gency approach’ helps one to understand the con-
ditions under which boards are more effective as
decision-making groups and identifies the contin-
gencies that foster or constrain board ability to
enhance corporate innovation.
Second, compared with previous research on
boards, this study depicts a complementary
perspective on the study of boards, i.e., a per-
spective that shows how different theories
may fit within a contingency context (Boyd,
Haynes and Zona, 2011; Ocasio, 1994). The ulti-
mate objective of the present study is to high-
light how the adoption of a multi-theoretical
approach may enrich and empower our ability
to understand boards and the sources of their
effectiveness.
Theoretical background
Adoption of a ‘contingency approach’ to the study
of boards
The structural contingency perspective (Burns
and Stalker, 1961; Lawrence and Lorsch, 1967)
300 F. Zona, A. Zattoni and A. Minichilli
© 2012 The Author(s)
British Journal of Management © 2012 British Academy of Management.
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