Opening the Black Box: Understanding the Microdynamics of Board Involvement in Product Innovation

Abstract

Research has long assumed that boards of directors use their human capital to monitor strategy or advise on it, but less is known about how directors share and extend their varying expertise in order to become involved. In this study, we address this issue by studying board involvement in product innovation - a major, long-term strategic challenge. Using a multiple-case study of three listed pharmaceutical firms, we find that a multi-channel board design facilitates two board involvement processes. First, the specialized director and the board subgroup channels monitor scientific issues and advise on them through dynamic knowledge sharing exchanges with employees at multiple levels. Second, the full board channel reacts to innovation proposals in formal board meetings and focuses on the strategic aspects of innovation when monitoring and advising. Outside directors’ specialized knowledge and the full board’s diverse human capital are jointly leveraged for innovation through these processes. Our findings contribute to corporate governance research by providing a systematic and fine-grained framework that conceptualizes governance as a multi-channel and multi-process approach and depicts the microdynamics of board involvement.