How retaining different inside directors on the board influences R&D-intensity: An extension of agency-theory applied to the high-tech sectors

Abstract

Agency theory views board independence, retaining a high fraction of outside directors, as a hallmark of effective corporate governance. Consequently, many boards have become so “independent” that over 50% of S&P 1500 firms only have one inside director, the ‘lone-CEO’. A small but quickly growing body of ‘pro-insider’ research in agency theory stresses the value of retaining a few additional inside directors to ensure that outside directors are better informed about R&D investments, and to help guide the CEO's long-term technology strategy. We extend agency theory by showing how and why different executive roles, namely the CEO, CTO, and CFO result in contradictory motivations towards R&D investments, due to each inside director's unique resource dependency with key stakeholders. Specifically, we argue that a conflict exists between the CTO's strategic control role and the CFO's financial control role and that the conflict has contrasting consequences for R&D investments. We use panel data analysis to test our theory on a sample of 390 S&P 1500 firms from the high-tech industries, over the period 2002–2015. We find that R&D-intensity increases significantly when a CEO is accompanied by a CTO inside director. Conversely, we find that R&D-intensity substantially decreases when a CEO is joined with a CFO inside director. In fact, a lone-CEO only board is associated with a higher R&D-intensity than a board with both the CEO and CFO. Therefore, whether the CTO or CFO accompanies the CEO on the board matters for preserving R&D expenditure.