Contextualizing corporate governance and innovation generation: On managerial risk taking

Abstract

Managerial risk taking has increasingly been highlighted as a prerequisite for innovation. Since innovation is viewed as a high-risk, high-cost endeavour, CEOs often are reluctant to become advocates for innovation. However, not much is understood in terms of managerial risk-taking behaviour in relation to innovation within strong vs. flexible governance settings at the level of the firm. In an attempt to fill this void, the current paper attempts to contextualize managerial risk taking behaviours within corporate governance environments and its interaction with the innovation generation activities of the firm. In the context of innovation, corporate governance would relate to exercising control over resource allocation, as well as the nature of an innovative investment strategy while relying on the incentives and abilities of individuals who exercise that control. While both internal and external corporate governance mechanisms serve to enhance firm innovation activity, in environments where such mechanisms are mandated then one can expect greater managerial risk-aversion towards innovation. In such a scenario there is in due course a trade-off on the time and resources that could be allocated towards innovation generation. In order to arrive at a theory of the innovative enterprise given certain corporate governance environments, future studies should go beyond the counting of R&D and patent statistics. Undertaking a holistic approach in understanding the role that corporate governance would play on firm innovation generation activities would enable adoption of policies that promotes managerial risk taking and subsequently innovation generation.