Independent Boards and Innovation

Benjamin Balsmeier (TU Freiberg), Lee Fleming & Gustavo Manso, “Independent Boards and Innovation”

Much research has suggested that independent boards of directors are more effective in reducing agency costs and improving firm governance. Less clear, however, is how they influence innovation and innovation search strategies. Relying on regulatory changes for identification, we show that firms that transition to independent boards focus on more crowded and familiar areas of technology. They patent and claim more and receive more total future citations to their patents, though the citation increase comes mainly from incremental patents in the middle of the citation distribution; the numbers of uncited and highly cited patents - arguably corresponding to riskier and completely failed or breakthrough inventions, respectively do not change significantly. Split samples indicate stronger effects for research-intensive firms and firms with more entrenched managers. Overall the results indicate that strengthened governance improves innovation performance along existing trajectories, without changing the possibility of a breakthrough.