Boards of Directors,Innovation, and Performance: An Exploration at Multiple Levels

This work reports on an investigation of the dynamics of governance over breakthrough innovation within Fortune 1000 firms. The primary research question investigates the boundary of agency theory within the firm. Using agency and stakeholder theoretic perspectives, the study tests the hypothesis that innovation will thrive in firms that combine a board of directors operating in accordance with a high agency theoretic focus in addition to an innovation governance board operating deeper within the firm that employs a strong stakeholder theoretic orientation in its behavior. The model is tested with data from 98 large firms. Results suggest that the relationship between board of directors' behavior and the firm's overall innovativeness is mediated by innovation decision‐making boards that (1) promote projects that are breakthrough in scope, (2) incorporate input of diverse constituencies within the firm, (3) exhibit patience with financial results, and (4) engage in frequent, informal interactions with project teams. Firms exhibiting high board of director agency orientation in combination with loyalty to mandate, patient financial capital disposition, inclusiveness, and project team interaction as described above for innovation governance board decision‐making prove to be the most innovative as measured by external indicators. For firm innovativeness, consolidated managerial power and behavior is frequently present at the upper levels of the firm, but must be broken down at deeper levels of the firm. This research offers implications to innovation decision‐makers as to how to proceed if the intent is to offer commercializably successful breakthrough innovations.