Board human capital diversity and corporate innovation: a longitudinal study

• DOI: https://doi.org/10.1108/CG-03-2021-0126
• Published date: 18 October 2021
• Date: 18 October 2021
• Pages: 680-701
• Subject Matter: Strategy,Corporate governance
• Author: Tao Wang

Board human capital diversity and

corporate innovation: a longitudinal study

Tao Wang

Abstract

Purpose –The purpose of this paper is to investigate the effect of board human capital diversity on

corporate innovation. Moreover, it examines the moderating effect of internal social capital on the

relationshipbetween board human capital diversityand corporate innovation.

Design/methodology/approach –The hypotheses are tested using a data set on Standard & Poor’s

1500 firms from 2000 to 2015. To overcome omit variable bias and reverse causality, this paper uses

change-on-changeregression by exploringthe exogenous shock of the death of thedirectors.

Findings –Findings show that board industry diversity has a curvilinear relationship with corporate

innovation.In addition, the board co-tenure experience,a key factor of internal social capital,can mitigate

the risk of boardindustry diversity and improve corporateinnovation.

Originality/value –Prior studies mostly considered the demographic dimension of diversity and,

therefore,have overlooked how other dimensions influencefirms. This paper considers the human capital

dimensionof board diversity and investigates the effectof board industry diversity on the firm’s innovation

outcome. In addition, this paper also addresses the question of whether the interaction of different

director attributes,namely, board human capitaland board internal social capital, can complementeach

other to enhancecorporate innovation.

Keywords Innovation, Human capital, Board diversity, Internal social capital

Paper type Research paper

1. Introduction

The board of directors is the centerpiece of corporate governance and plays a key role in

firms by advising and monitoring the managers. The literature has examined how board

influence decision-making, such as strategic direction (Golden and Zajac, 2001;Vairavan

and Zhang, 2020), market entry (Tuschke et al.,2014), mergers and acquisitions (Walters

et al.,2008

), corporate social performance (Zhang, 2012) and firm value (Fern

andez-

Temprano and Tejerina-Gaite, 2020). In the past few years, board diversity has received an

increasing attention from both academics and practitioners. A diverse group of directors

brings a variety of talents, expertise and information, which helps the firm and chief

executive officer (CEO) identify opportunities, generate ideas and overcome blind spot

(Groening, 2019). The diverse board can bring new perspectives and insights, promote

exchange of ideas and enhance creativity and innovation (Arena et al., 2015). At the same

time, greater diversity can cause communication and coordination problems, create

conflicts and delay the decision-making process, especially under uncertain conditions

(Darmadi, 2013;Vairavanand Zhang, 2020).

Given the contradicting effect of board diversity, the relationship between board diversity

and firm performance, especially innovation performance,has received increasing attention

recently. Firms with female directors tend to invest more in innovation and obtain more

patents and citations for given R&D expenditures (Fındık and Ocak, 2019;Torchia et al.,

2011;Chen et al., 2018). Ethnic diversity positively relates to the investment in innovation

Tao Wang is based at the

School of Management,

University of Bristol, Bristol,

UK.

Received 31 March 2021

Revised 3 June 2021

14 September 2021

Accepted 29 September 2021

PAGE 680 jCORPORATE GOVERNANCE jVOL. 22 NO. 4 2022, pp. 680-701, ©EmeraldPublishing Limited, ISSN 1472-0701 DOI 10.1108/CG-03-2021-0126

(Miller and del Carmen Triana, 2009;Vairavan and Zhang, 2020). Age diversity positively

relates to firm’s product innovation, but negatively relatesto organizational innovation (Galia

and Zenou, 2012).

While some progresses have been made, there are still some issues and gaps need to be

addressed. First, the empirical evidence on the effects of board diversity on innovation

focuses mainly on demographic diversity. As diversity is a multifaceted concept, the

conclusions drawn from the literature are limited without considering other attributes of

diversity into consideration (Baker et al.,2020;Miller and del Carmen Triana, 2009).

Investigating other facets of board diversity could be more helpful to disentangle the

implications of the board (Baker et al.,2020;Johnson et al.,2013).

Second, in recent years, board human capital has been recognized as a key factor in

contributing to firm performance (Johnson et al.,2013). However, less research has

focused on the human capital of corporate board and whether human capital diversity can

affect firm’s innovation performance is unknown (Calabro

`et al.,2021;Sarto et al.,2019;

Valenti and Horner, 2020). To the best of my knowledge, Sarto and her colleagues’ paper

(2019) is the only publication that examines how human capital heterogeneity affects

company innovation. However, as the paper investigating board of directors in Italian

companies, the conclusions drawnfrom this study may not be applicable in countries using

one tier board of director system,such as the USA, UK and Australia.

Third, as board composition is not exogenously determined but rather is affected by prior

decisions and firm characteristics that in turn affect board decision (Adams et al.,2010;

Johnson et al.,2013). Addressing the endogeneity issue in executive research is essential

for gaining a grasp of the causal mechanisms that lie behind empirical association

(Hambrick, 2007). However, thereis a lack of approach to address the endogeneity issue to

better establish the causal relationship between board feature and firm outcomes (Baker

et al.,2020

;Johnson et al.,2013).

Finally, empirical studies have not explored whether social capital can moderate the

relationship between board diversity and corporate innovation, despite literature has

suggested that board social capital influence and guidethe board decision-making (Booth-

Bell, 2018; Pere-Calero et al., 2016). Therefore, understanding how board human capital

and social capital interact with each other to determine corporate innovation could further

broaden current literature.

This study pursues to fill these gaps. This study shows how human capital diversity,

especially industry diversity which is the key factor of human capital diversity (Johnson

et al.,2013

), explains corporate innovation. Specifically, I study the innovation performance

of corporations with board with different industry experience. I assess the innovation

outcomes based on the number of patent applications that the organisation files and the

sum of patent forward citations, which are widely used and capture the innovation

performance well (Hall et al.,2001;Li, 2019). Using the BoardEx database and the Harvard

Patent Database, along with other sources, I constructed a panel data set of Standard &

Poor’s 1500 firms during the 2000–2015 period. I examine how industry diversity of the

board affects the number of patent application and patent citations a firm makes. One

empirical challenge is that the innovativeness of a firm may affect the likelihood of

appointing diverse directors. To overcome this reverse causality problem, I conduct further

analysis using the death event of board directors as an exogenous shock to estimate

change-on-change regression on a sub-sample of firms that experienced the death of a

director.

The results show that board human capital diversity has a significant effect on corporate

innovation. This study contributes to the research stream on innovation and corporate

governance in four ways. First, this study develops theory on how relevant elements of

board human capital affect strategy decision-making. Previous research has linked board

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