Board control and innovation in small and medium-sized companies

Abstract

This paper investigates how the board of directors affects product and process innovation in small and medium-sized enterprises (SMEs) through their control role. Researchers so far mainly relied on agency theory. However, we argue that the agency theory assumptions apply less in SMEs and therefore develop new theory for explaining this relationship. We draw on the recent theoretical view of stability and change as a duality (Farjoun, 2010), as we argue that control by the board of directors is needed for innovation because this directs focus in the right direction, reduces uncertainty and provides a consistent frame wherein the innovation can take place. Statistical analysis on a sample of 150 Belgian SMEs revealed that board involvement in control is positively related to process innovation, but not related to product innovation. Overall, the present study adds to a better understanding of how boards contribute to firm value creation.