Board Background Heterogeneity and Exploration‐Exploitation: The Role of the Institutionally Adopted Board Model

• Author: Jana Oehmichen,Sven Nichting,Mariano L.M. Heyden,Henk W. Volberda
• DOI: http://doi.org/10.1002/gsj.1095
• Published date: 01 May 2015
• Date: 01 May 2015

BOARD BACKGROUND HETEROGENEITY AND

EXPLORATION-EXPLOITATION: THE ROLE OF THE

INSTITUTIONALLY ADOPTED BOARD MODEL

MARIANO L.M. HEYDEN,1* JANA OEHMICHEN,2SVEN NICHTING,3

and HENK W. VOLBERDA3

1International Business and Strategy Discipline Group, Newcastle

Business School, Newcastle, Australia

2Department of Management and Control, Georg-August-Universität

Göttingen, Göttingen, Germany

3Department of Strategy & Entrepreneurship, Rotterdam School of

Management, Erasmus University, Rotterdam, Netherlands

Boards of directors are in a position to contribute vital knowledge resources to strategy-

making. We propose that the relation between board functional background heterogeneity and

exploration-focused versus exploitation-focused strategy is contingent on the extent to which

the institutionally adopted board model enables or constrains inclusion of the board’s knowl-

edge resources in strategy-making. We empirically juxtapose the Anglo-Saxon (‘one-tier’) and

Rhineland (‘two-tier’) board models in the U.K. and Germany, respectively, and find support

for our assertion that the influence of board functional background heterogeneity on relative

exploration orientation is more pronounced when the adopted board model accommodates

inclusion of the board’s knowledge resourcesinto strategy-making. Implications for theory and

practice are discussed. Copyright © 2015 Strategic Management Society.

INTRODUCTION

Boards of directors play an important role in shaping

the strategic focus of the firm (Daily, Dalton, and

Cannella, 2003; Hillman and Dalziel, 2003;

Johnson, Schnatterly, and Hill, 2013).While contrib-

uting their knowledge resources to inform strategy-

making, boards may sharpen or broaden strategic

orientation through the heterogeneity in background

experiences they bring to the table (Pugliese et al.,

2009; Tuggle, Schnatterly, and Johnson, 2010). By

providing counsel, engaging critically in strategic

analysis, and defining the scope of task-related dis-

cussions (Miller and Triana, 2009; Tuggle et al.,

2010; Zhang, 2010), the variety in functional per-

spectives contributed by boards could influence

whether strategy emphasizes the exploitation of

existing strengths or the exploration of novel oppor-

tunities (Jansen, Van Den Bosch, and Volberda,

2006; Lavie, Stettner, and Tushman, 2010; March,

1991; Uotila et al., 2009). However, in a world of

interconnected global business and shifting eco-

nomic epicenters, Anglo-Saxon assumptions of how

boards influence strategy are still the default setting

for guiding theory—but poorly reflective of the

richer global plurality in governance systems.

Several powerhouses in the global economy (e.g.,

China and Germany) subscribe to alternative institu-

tionalized board models varying in conventions and

prescriptions about structural separation of board

Keywords: corporate governance; boards of directors; board

model; exploration-exploitation; organizational learning; cross-

national

*Correspondence to: Mariano L.M. Heyden, International

Business and Strategy Discipline Group, Newcastle Business

School, University House, Cnr Auckland and King St.,

UNH3.20B, Newcastle, NSW 2300, Australia. E-mail:

mariano.heyden@newcastle.edu.au

Global Strategy Journal

Global Strat. J., 5: 154–176 (2015)

Published online in Wiley Online Library (wileyonlinelibrary.com). DOI: 10.1002/gsj.1095

Copyright © 2015 Strategic Management Society

members—and, thus, the board’s ability to formally

participate in strategy-making (Aguilera, 2005;

Conyon and Muldoon, 2006; Douma, 1997; Shleifer

and Vishny, 1997; Xiao, Dahya, and Lin, 2004). This

observation implies that accumulating knowledge

anchored in one-sided assumptions of governance

could be unnecessarily restricting our understanding

of how boards influence strategy from a global per-

spective. In fact, an overemphasis on Anglo-Saxon

assumptions does not seem warranted, as it is not the

dominant framework adopted in terms of the overall

global economic contribution of countries adhering

to its conventions (Adams and Ferreira, 2007; La

Porta, Lopez-de-Silane, and Shleifer, 1999; Shleifer

and Vishny, 1997). Take, for instance, the European

Union (EU), where firm economic activity in

member states not subscribing to the Anglo-Saxon

specification accounted for about 60 percent of the

total nominal GDP of the union in 2012.1Yet, the

literature is thin on the strategic implications of

‘alternative’ board models observed worldwide.

In this study, we start to clarify how boards influ-

ence strategy in a global context by introducing the

institutionally adopted board model as an important

contingency in the relation between board knowl-

edge resources and firm strategic orientation (i.e.,

exploration versus exploitation focus). We propose

that boards may be differentially enabled to contrib-

ute their knowledge resources to strategy-making

given the board model adopted in a particular insti-

tutional context. In examining the implications of

different models for understanding the relation

between boards and strategy, we distinguish between

the two predominant board models observed glob-

ally. On the one hand, there is the Anglo-Saxon

one-tier board consisting of both executive and

nonexecutive directors; this is prevalent in countries

such as the U.K. and the U.S. (Goergen, Manjon, and

Renneboog, 2008; Thomsen and Conyon, 2012).

The Rhineland archetype, in turn, is characterized by

atwo-tier model consisting of structurally separated

executive and supervisory boards and is adopted in

countries such as Austria, China, Denmark, Finland,

Germany, and The Netherlands (Cho and Rui, 2009;

Kwee, Van Den Bosch, and Volberda, 2011).

Our study contributes toward an important bridge

between corporate governance and organizational

learning by introducing the board of directors into the

exploration-exploitation debate. Focusing on the

knowledge resource provisioning role of boards (cf.

Filatotchev et al., 2003), while conceptualizing adap-

tive strategy in terms of exploration-exploitation ori-

entation (Uotila et al., 2009), we theorize about

information processing mechanisms (i.e., exchange

and integration) through which a board’s heteroge-

neous knowledge resources may influence strategy

(Posen and Levinthal, 2012; Volberda, Foss, and

Lyles, 2010). By extension, a board’s knowledge

resources may help define the intrafirm strategic

context that guides the scope of organizational atten-

tion foci (Tuggle et al., 2010), span of information

search activities (Heyden et al., 2013; Mom, Van Den

Bosch, and Volberda, 2007), and latitude for experi-

mentation (Burgelman, 1983) that subsequently

cascade into concrete learning processes and out-

comes such as adaptive change (Crossan, Lane, and

White, 1999; Haynes and Hillman, 2010), innovation

(Jansen et al., 2006), and performance (Uotila et al.,

2009).

By casting different board models into perspective,

we help develop theory and provide evidence on how

different configurations may equip firms with com-

parative strengths and weaknesses for guiding learn-

ing orientation in diverse global contexts. As the

board is the highest authority in the firm entrusted

with safeguarding the strategic orientation of the firm,

we empirically document how the adopted board

model affects the relation between board func-

tional background heterogeneity and exploration-

exploitation orientation. We theorize that as a board’s

knowledge resources are largely tacit (Miller, Zhao,

and Calantone, 2006; Kor and Sundaramurthy, 2009)

and exploration-exploitation orientation is influenced

by the combination of knowledge from different

domains of organizational activity (Easterby-Smith,

Crossan, and Nicolini, 2000; Fiol and Lyles, 1985;

Hotho, Becker-Ritterspach, and Saka-Helmhout,

2012; Lane, Salk, and Lyles, 2001), the extent to

which board involvementin strategy-making is struc-

turally facilitated or constrained by the institutionally

adopted board model matters for understanding varia-

tion in exploration-exploitation orientation in differ-

ent global settings. In doing so, we provide an

important piece of the answer to Lavie et al., (2010)

who explicitly recognized that a key research avenue

is to study differences in organizations’ inclinations

to explore or exploit in different national contexts.

In addition, we address some criticisms of the

‘undercontextualized nature of corporate gover-

nance’ by articulating an important contingency that

1Based on the most recent 2013 International Monetary Fund

(IMF) estimates and the list of EU countries in Adams and

Ferreira (2007: Table 1).

A Cross-Institutional Model of Boards and Organizational Learning 155

Copyright © 2015 Strategic Management Society Global Strat. J., 5: 154–176 (2015)

DOI: 10.1002/gsj.1095