Dr. Roger M Barker and Prof. Iris H-Y Chiu

Corporate Governance and Innovation in Companies

Technological and scientific innovation is widely recognised as a major determinant of productivity growth and economic competitiveness. For companies that are capable of harnessing it, innovation is the magical ingredient that underpins new products and business models (Munari and Sobrero, 2003; Pisano, 2015). An enterprise that is able to innovate in a commercially-viable manner is well-placed to outperform its competitors and create value for investors, customers and other stakeholders. Innovation is therefore important to securing the long-term success of many companies. The innovative capacity, development and harnessing of innovation in companies is shaped not only by market incentives but also by internal firm governance structures (Belloc, 2012). Lately, questions can also be raised as to whether certain conventions in corporate governance standards promote or indeed hinder innovation in companies (McCahery and Vermeulen, 2006; Shadab, 2008; Bianchini et al, 2015). This paper adopts a desk-based approach in surveying the theoretical and empirical literature on the effects of corporate governance on innovation in firms, and makes two theoretical propositions. First, we argue that conventions in corporate governance standards based on the agency perspective of corporate governance are not necessarily antagonistic to innovation but they must be reconciled with and should not undercut the resource-based view of corporate governance that promotes innovation. Second, we argue, in the light of the implications of the first proposition, that excessive prescriptions in corporate governance standards are probably sub-optimal for promoting innovation.

We apply our propositions to the specific context of Boards and suggest that Boards should ensure that companies have adequate access to a range of resources for innovation and also have a role to play in monitoring that such resources are harnessed and well-utilised. We critically examine the UK Corporate Governance Code provisions on Board structures, responsibilities and composition, and make suggestions as to how Boards can better serve the purposes of corporate innovation.