Friendly Boards and Innovation

Chair–CEO trust and firm performance

“…Studies in this stream of the literature find that firms located in regions of high social trust are associated with lower likelihoods of corporate misconduct (Dong et al, 2016;Qiu et al, 2019), tax avoidance (Xia et al, 2017), corruption (LaPorta et al, 1997, earning misstatement (Garrett et al, 2014), and bad news, hoarding behaviors of managers (Li et al, 2017). 2 Second, we provide new empirical evidence regarding the importance of the advisory role of a board and the benefits of having a management-friendly board (Adams and Ferreira, 2007;Baldenius et al, 2014;Harris and Raviv, 2008;Kang et al, 2018;Schmidt, 2015). Finally, our study reveals that such a relationship between the CEO and the board chair can impact firm value; research on the importance of this relationship is inconclusive.…”

“…Following the literature's suggestion that the board's advice is more beneficial for firms with greater advisory needs (Kang et al, 2018;Schmidt, 2015), we use firm diversification levels to proxy for a firm's advisory needs. 7 Diversified firms engage in more complex businesses and are likely to have more significant advisory needs.…”

“…A company's innovation activities usually involve a multi-stage, long-term process to develop and eventually commercialize new and untested ideas (Holmstrom, 1989). Such innovation typically requires significant board advisory inputs (Kang et al, 2018). As such, it is crucial for management to discuss the innovation process with the board so that it can provide timely feedback about strategies for both the current and next stage of development (Manso, 2011).…”

The board of directors and firm innovation: A meta-analytical review

“…Regarding the empirical evidence, several studies indicate that directors' links with other firms may be an effective channel for knowledge and experience and may also promote partnerships with other organizations for joint innovation (Wincent et al, 2010(Wincent et al, , 2012. Previous studies also agree with these findings (Ashwin et al, 2016;Chen, 2014;De Cleyn & Braet, 2012;Helmers et al, 2017;Kang et al, 2018;Swift, 2018;Takahiro, 2015c). 3 Hernández-Lara & Gonzales-Bustos (2019) perform a detailed analysis to identify the effect of trading links (both inside and outside the industry) and social links (with women directors, outside, independent, and international directors) finding a positive effect on innovation for directors' interconnections outside the industry and for independent directors.…”

“…It argues that when a minority group, such as women directors on boards, reaches a certain threshold or critical mass, there is a qualitative change in the nature of the group's interactions and organizational changes which allows innovation to begin (Torchia et al, 2011). In addition, the friendly board theory (Adams & Ferreira, 2007) has been used, suggesting that a close relationship between directors and the CEO can be beneficial by creating an environment of cooperation, confidence, and exchange of information that enables improved decision-making in different aspects like innovation (Kang et al, 2018). Another theory used is the upper-echelon theory (Hambrick & Mason, 1984), which assumes that the psychological and observable characteristics of managers and directors, such as age, gender, experience, tenure, and educational and functional background, are determinants of strategic decisions such as firm innovation (Wincent et al, 2012).…”