Corporate governance mechanisms and R&D intensity in OECD courtiers

• DOI: https://doi.org/10.1108/CG-11-2019-0349
• Pages: 863-885
• Published date: 09 June 2020
• Date: 09 June 2020
• Author: Aws AlHares
• Subject Matter: Corporate governance,Strategy

Corporate governance mechanisms and

R&D intensity in OECD courtiers

Aws AlHares

Abstract

Purpose –This study aims to investigatethe impact of ownership structure and board structure on risk-

takingas measuredby research and development (R&D) Intensityin OECD countries.

Design/methodology/approach –A panel data of 300 companiesfrom Anglo American and European

countries between 2010 and 2016 were used. The ordinary least square multiple regression analysis

procedure is used to examine the relationships. The findings are robust to alternative measures and

endogeneities.

Findings –The results show that institutional ownership, board size, independent directorsand board

diversity are negativelyrelated to risk-taking, with greater significance among AngloAmerican countries

than among Continental European countries. In contrast, the results show that director ownership is

statisticallyinsignificant.

Originality/value –This study extends and contributes to the extant corporate governance (CG)

literature, by offering new evidence on the effect of ownership and board structure on risk-taking

between two different traditions. The findings will help regulators and policy-makers in the OECD

countries in evaluating the adequacy of the current CG reforms to prevent management misconduct

and scandals. These findings are relevant for companies aiming to adopt the most suitable

governance mechanisms to pursue their R&D objectives and for policymakers interested in promoting

R&D investment.

Keywords Corporate governance, R&D intensity, OECD, Resource dependence theory,

Board structure, Ownership structure

Paper type Research paper

1. Introduction

Corporate governance (CG) in the Organisation for Economic Co-operation and Development

(OECD) countries goes back to the Cadbury report (1992). Over the next three decades, CG

has become a major undertaking by the OECD in OECD countries and other countries. With the

emphasis on good governance, OECD countries have developed codes of CG that outline

standards and recommendations. These standards and recommendations assure investors of

the rules of conduct governing the countries. While individual countries have developed their

codes, the OECD has developed its Principles of CG. The OECD Principles is a minimum

standard for all OECD countries. These Principles have been adopted by many non-OECD

countries, as evidence of having strong governance principles that protect investors and other

stakeholders.

Previous studies showed the importance that research and development (R&D) plays in

introducing new products and process and enabling the productivity growth and

sustainability (Driver and Guedes, 2012;Honore

´et al.,2015;Pindado et al.,2015).

Consequently, R&D investments improve the technological innovation capability, which is

considered a priority for developed countries like ones from the OECD. However, R&D

investment brings high uncertainty in terms of appropriability, is intensive in sunk costs and

has high payoff (Baysinger et al.,1991;Driver and Guedes, 2012;Eng and Shackell, 2001;

Aws AlHares is based at

the Department of

Accountancy and Finance,

Business School, University

of Huddersfield,

Huddersfield, UK.

Received 16 November 2019

Revised 11 February 2020

25 April 2020

10 May 2020

12 May 2020

Accepted 14 May 2020

DOI 10.1108/CG-11-2019-0349 VOL. 20 NO. 5 2020, pp. 863-885, ©Emerald Publishing Limited, ISSN 1472-0701 jCORPORATE GOVERNANCE jPAGE 863

Lv et al., 2019). In that scenario, R&D strategies and decisions lead to several conflicts of

interest between shareholdersand managers (Honore

´et al.,2015).

In the circumstances of so many conflicts, CG becomes essential. CG consists of both

internal and external mechanisms that reduce agency conflicts arising from the separation

of ownership and control (Shleiferand Vishny, 1997). These mechanisms guarantee a return

on stakeholders’ investments whileavoiding expropriation by insiders (La Porta et al.,2000).

Thus, the board of directors emerges a crucial player in solving those conflicts generated

by the risks in R&D (Srivastav and Hagendorff, 2016). Board of directors represents the

interests of shareholders (Muth and Donaldson, 1998) and other stakeholders. The

importance of the board can be analysed from an agency theory perspective (Baysinger

et al.,1991

;Jarrell and Poulsen, 1988;Jensen,1986), but other existing theories also clarify

the importance of the board such as resource dependencetheory (Chen and Hsu, 2009).

Using the concept of risk, agency theory is seen as having implications for the intensity of

investment in R&D. This theory shows that managers tend to be risk-averse, preferring to

short-term investments and strategies that promote efficiency. This may harm R&D intensity

(Eisenhardt, 1989). The majority of shareholders, on the other hand, maybe risk-neutral as

they could diversify their portfolio. Minority shareholders andactive investors are more likely

to want short-term investments, where there is less risk. The goal of corporations, under

these circumstances, is to promote CG practices that would align the interests of the

managers with those of shareholders. When this happens, according to Agrawal and

Knoeber (1996), it is hoped that thiswould increase R&D intensity.

Despite many advances, a lack of consensus still exists regarding whether and how

ownership and board structure affect the risk-taking between two different traditions: the

Anglo-American (Shareholding CG model) and the Continental European (stakeholding CG

model). Currently, several studies examined the relationship between CG and corporate

risk (Alhares and Ntim, 2018;Ntim et al.,2017;Beasley, 1996;Hansson et al., 2011;Letza

et al.,2004

;Tran, 2014). For example, Haque (2019) reported a negative association

between ownership concentration and bank risk-taking in middle-east and north Africa

countries. However, the evidence relating to the impact of CG on risk-taking measured by

R&D intensity remains scarce. In a recent review, Asensio-L

opez et al. (2019) evaluated

both theory and empirical evidence and found no conclusive relationship between these

variables. According to them, authors find different results depending on the sample,

country or firms studied. Besides,there is no consensus regarding the relationship between

board composition and innovation, as both positive and negative arguments are reported.

In summary, empirical evidence not always point in the same direction. Comparably, the

limited evidence on the impact of CG mechanisms on risk-taking focussed mainly within a

single country rather than a cross-country level (Ashbaugh et al., 2004;Ntim et al.,2012).

Conceivably, this restricts the generalisability of their outcomes. Based on that, the current

study aims to extend existing knowledge by providing new cross-country evidence on the

level of CG best practice recommendations in OECD countries. Finally, it offers new

evidence on the effect of country-level and firm-level factors on CG best practices among

OECD countries.

To this end, the current paper looks specifically at 12 countries, namely, the USA, New

Zealand, Ireland, UK, Australia, Canada, France, Germany, Spain, Italy, Switzerland and

Japan, to examine corporations in each of these countries that use R&D and those without

R&D. These countries are drawn from the Anglo-American or Shareholding CG model and

the Continental European or Stakeholding CG model. To contribute to filling this gap, we

performed a comparative analysis between these two traditions to look at the impact of CG

mechanisms on both.

To the best of my knowledge, this will be the first study looking for CG mechanisms and

risk-taking measured by R&D intensity in 12 different countries. Even though Tran (2014)

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