Outside Directors on the Board and Innovative Firm Performance

Abstract

We investigate empirically how outside directors on supervisory boards influence innovative performance of the firms they monitor. Based on panel data of the largest German companies the econometric analysis shows a robust and significant positive influence of external executives on innovative firm performance, measured by patent applications. Differentiating between outside directors from innovative and non-innovative companies reveals opposing effects. Solely outside directors from patenting firms enhance innovative activities at the firms they monitor, while outside directors from non-innovative firms are associated with a reduction in patenting. The results indicate that outside board memberships can serve as a channel for scarce specific knowledge and expertise.