July 23, 2021

Corporate Governance: Better Governance Means Less Innovation?

Here’s another study that’s sure to honk off the governance-industrial complex. Critics of some of the corporate governance reforms put in place over the past two decades like to suggest that the increased “navel gazing” required of corporate boards in the name of good governance makes public companies less innovative.  According to a recent study, they may be on to something.  Here’s the abstract:

In this study, we investigate the effect of corporate governance reforms on corporate innovation by constructing a comprehensive firm-level panel dataset across 58 countries from 2000 to 2015. We find that both the quantity and quality of innovation decrease after the initiation of the reforms.  Affected firms also conduct less innovation that explores new knowledge versus that exploits existing knowledge.

The effect is more pronounced for firms operating in more competitive industries or with higher operational uncertainty. The results suggest that corporate governance reforms may induce managerial myopia and mitigate long-term investment in risky innovation.

Maybe this explains why we get a billion new smart phone apps every year but I’m still waiting for my jetpack.

John Jenkins