Women in Business

The importance of diversity on boards of directors’ effectiveness and its impact on innovativeness in the bioeconomy

Fundamentally, companies are guided by three generic strategies: product leadership, customer intimacy, and operational excellence (Balas, 2015). Each of these strategic approaches is supported by the components of efficiency, service, and functionality. The quest for differentiation from competitors in a mature industry highlights the importance of innovation. Innovativeness is not only associated with a firm’s products, but also with the organization’s ability to effectively align its strategy, structure, systems and leadership practices to support innovation. Effective alignment ensures that the company’s resources are deployed optimally to support the chosen strategy, including the ability to perform distinctive sets of activities that lead to a unique, i.e., differentiated mix of deliverables. Strategy and structure establish the maximum level of firm performance possible and strategic alignment determines how close actual performance comes to that maximum. Scholars and practitioners in the industry agree with these concepts, with slight differences in emphasis (Chan and Mauborgne, 2009). Innovative corporations excel in these processes and are thus agile and strategic in making decisions (Ehsan et al., 2017). The systemic understanding of market trends, value chain developments, and consumer or customer needs are some of the factors that contribute to an innovative corporation’s success (Xinchun et al., 2016; Chen, 2019; Jari and Sahebi, 2013).

The board of directors’ key function is to ensure that the appropriate interests of shareholders and stakeholders are met by overseeing the firm’s executive management. This broad component of corporate governance is used to separate ownership and control (Kose and Senbet, 1998). An important element in the board’s oversight is to approve and monitor the company’s business strategy to achieve long-term value creation (Eloranta, 2019). The authority and responsibility for operating the company is delegated to the CEO; and through the CEO to the executive and senior management. Relating to innovation, the board of directors monitors the progress of strategy implementation, as well as influences the senior team in establishing a corporate culture that encourages innovation. The board operates through a well-established committee structure that includes executive compensation, finance, and audit; (and more recently) sustainability and ethics. The rise in focus on ethics, corporate social responsibility, and diversity have become critical components of the board of directors’ responsibilities (Fuente et al., 2017; Braverman, 2019). The boundary between oversight and management is not always precise, and some situations (such as a crisis) may require greater than usual board involvement in operational matters. To effectively operate, boards need to be collegial bodies in the traditional sense as their members share the responsibility to have both individual and collective accountability (Keay, 2017; Paine and Srinivasan, 2019).

The importance of innovation to any corporation is clear. It depicts the ability to identify and react to new business opportunities. Zahra and Covin (1994) suggested that innovation is widely considered the life blood of a corporation and a critical component of its survival and growth. Baregheh et al. (2009) defined innovation as “… the multi-stage process whereby organizations transform ideas into new/improved products, service or processes, in order to advance, compete, and differentiate themselves successfully in their marketplace”. Kimberly (1981) defined innovation from a different perspective by stating: “There are three stages of innovation: innovation as a process, innovation as a discrete item including, products, programs or services; and innovation as an attribute of organizations”. Kimberly’s definition of innovation as “an attribute of organizations” serves as the lens through which we examine highly innovative companies.

A firm’s long-term performance requires organic growth and renewal, both born from innovation to create a competitive advantage in the economy (Baregheh et al., 2009). Therefore, research on a firm’s ability to be successfully innovative must include a critical analysis of its highest level—the board of directors.

Assessing and ranking companies’ innovativeness is a challenging task (Blomqvist et al., 2004). Many corporate metrics have been developed and used, including the number of new products launched, new product sales, number of patents, number of R&D personnel, et cetera. (Thamhain, 2014). A major issue with these metrics is that they are lagging indicators, addressing the technical and product-focused side of innovation quite narrowly. In essence, innovation is ultimately a process of creating value that includes not just novel products, but also new business models and partnerships that enhance a firm’s ability to perform. Innovative companies use a wide variety of external data to support the implementation of their innovation processes (Xinchun et al., 2016). These include capturing and scouting promising new ideas, as well as identifying partnerships with start-up companies. Most innovative firms are able to attract investors who see the high potential of new revenue streams and premium talent that enables the company to excel in performance and execution. In this study, we used the Boston Consulting Group’s (BCG’s) annual global survey and ranking of the most innovative companies (Most Innovative Companies, 2018). Using an established ranking methodology as the baseline for this study reduced potential bias. The BCG survey assesses companies’ ability to use competitive intelligence, strategic partnerships, customers’ voice, value chain expertize, and big data or social network data in their innovation process. Furthermore, BCG identifies five ways in which leaders impact innovation—dedicating resources, investing in speed, taking smart risks, investing in data, and building advantaged capabilities (Most Innovative Companies, 2018). We used this existing data on the most innovative companies and compared it to the list of the largest companies in the bioeconomy to investigate the potential differences in the diversity of the composition of their board of directors. These findings were then interrelated to the companies’ innovation performance.

The most innovative companies and the bioeconomy

This article compares the top innovative companies with companies in the bioeconomy industry to determine the way the composition of a company’s board of directors affects its innovativeness. In general terms, the bioeconomy encompasses the use of renewable natural resources and their conversion into bio-based products and bioenergy. According to the Kondratieff Wave for economic cycles, the future role of the bioeconomy represents the next natural major wave in the evolutionary profile of the economy (Dabbert et al., 2017; Hakovirta and Lucia, 2019). As such, bioeconomy sectors have a strong potential for growth and innovation, by using a wide range of novel technologies and science. This includes, for example, biotechnology, nanotechnology, big data, and smart manufacturing. We selected the pulp and paper industry as our specific focus as it is one of the leading industries in this sector as determined by size, influence, and R&D investments. The pulp and paper industry and its associated sectors in the bioeconomy have done considerable work on innovation and sustainability during the past 20–30 years (Gaston et al., 1995; Collins, 1994). Examples of these efforts include the development of the best technologies available for water purifications, energy efficiency, and closed loop systems (Jyothirmayee et al., 2016; Gerstlberger et al., 2014; Genc and De Giovanni, 2020). With respect to bioenergy, pulp and paper companies are one of the major contributors in biomass and biofuel processing for sustainable energy solutions (Malik et al., 2016). The term biorefinery is associated with this industry and encompasses the concept of valorization of waste by products obtained from processing the lignocellulosic feedstock used in the industry (Karlsson et al., 2014). The use of wood fibers to replace the commonly used petrochemical-based textile materials and progress in reducing the use of plastics in packaging are examples of the latest innovations in sustainability (Kim et al., 2015). Unfortunately, while the pulp and paper industry has the potential to be innovative, it is not known for it. This is explained in part due to the perception among mature companies that some of the processes used in the industry are not perceived to require major changes to remain competitive. Moreover, the industry’s positioning as being distant from the consumer in the value chain may play a role in the lack of recognition of the need for innovation. Ten of the largest bioeconomy companies were compared with the ten most innovative companies in the world to further explore this interesting polarity. The working hypothesis is that a higher level of diversity in the composition of the board of directors positively affects a company’s innovativeness, which implies that the most innovative companies should have a higher level of diversity in some or all of the attributes measured than bioeconomy companies’ boards.

Corporate governance and the importance of diversity

In general terms, corporate governance is related to the mechanisms by which stakeholders exercise control over operational management and ensure that their interests are protected. The range of stakeholders includes equity shareholders, creditors, employees, suppliers, customers, and governmental entities. The senior executive team is responsible for making and implementing the corporation’s key operational decisions.

The board of directors is a fundamental component of corporate governance, serving as the voice of shareholders in overseeing executive leadership. The directors’ service on behalf of shareholders is critical due to the wide disbursement of stock in public corporations. Board independence, size, and composition (including diversity among its members) are essential aspects when examining whether or not the Board is effectively meeting its responsibilities. In this regard, a key board function is to help shape and guide the company’s long-term strategic positioning within its industry. It can be argued that the composition of the board of directors is core to its effectiveness as addressing strategic complexities requires diverse talent and perspectives. In this regard, progressive boards realize that they need to have an optimal composition that reflects the strategic priorities of the business and the diversity of its stakeholders (Kiel and Nicholson, 2003; Macaulay et al., 2018). Boards are increasingly recognizing that those with members who represent a good mix of age, experience, and background tend to foster constructive debate and decision-making. For example, the 2012 Credit Suisse Research Institute report, Gender Diversity and Corporate Performance, found that during the six-year period ending in 2011, companies with female representation had better share price performance, higher return on equity, and better average growth than did those with no women on their boards (Gender diversity and corporate performance, 2012).

Gender diversity at the board of directors’ level can be explored through multiple levels of analysis including individual, firm, industry, as well the board itself. For example, on an individual level, a female member of a board of directors can serve as a role model. At the firm level, gender diversity can have an effect on organizational legitimacy and corporate monitoring (Terjesen et al., 2009; Adams et al., 2009).

Somewhat surprisingly, there are only a few peer-reviewed empirical studies on the topic of increasing the numbers of women on corporate boards. It is noteworthy, however, that results from some of the available research indicate a strong correlation between boards that have female directors and innovation effectiveness measured through R&D expenditures and citations, especially in industries in which innovation and creativity are critical (Chen et al., 2018).

Discussions about the diversity in boards of directors often focus on gender and ethnicity, as well as independence from the firm’s internal pressures. The thrust of the argument in favor of a diverse board is to go beyond selection based upon a prospective members’ fit into one of these categories. Productive board discussions require a breadth of perspective that by definition are supported by diverse composition. Leszczyńska (2018) argued that selection of directors based on filling a category to meet the composition desired without considering whether the director can fill the need for varied perspectives reduces the opportunity for robust discussions and well-rounded decision-making. It can be stated that a board’s composition should reflect diversity in thinking, background, skills, experiences, expertize and a range of tenures that are appropriate given the company’s current and anticipated circumstances. It is reasonable to conclude that diverse backgrounds and experiences on corporate boards, including those of directors who represent the broad range of society, strengthen board performance and promote the creation of long-term shareholder value.

Research methodology

The most innovative companies list was selected using BCG’s 2018 annual ranking list (Most Innovative Companies, 2018). We used this list as much of the data on board of directors and company performance was from the same period. The BCG methodology for the Most Innovative Companies ranking is widely used in corporate planning and consulting. However, as with any global rankings, careful understanding of the methodology is needed. In principal, the way their data was collected was by surveying senior-level executives representing a wide spectrum of global industries to identify three companies they regard as top innovators across all industries. They were also asked to rank three of the most innovative companies in their own industry. Several financial metrics were also used to measure innovation in addition to the more subjective survey instrument. For the 2018 ranking, they focused on three financial metrics measured over the span of three years: total shareholder return (TSR), revenue and margin growth. To achieve a balance between the subjective opinions and financial metrics, the executives’ votes for companies within their industry accounted for 30% of the ranking, votes for companies outside their industry accounted for 30%, and (to simplify the financial inputs) three-year TSR accounted for 40%.

The methodology to measure aspects of innovation included whether or not a company fully utilizes external sources to identify new ideas for growth or new value creation projects. This provides a way of screening how well a company uses competitive intelligence, strategic partnerships in academia or industry, social networks or big data mining, for example. The study also focused on new innovation models and mechanisms, including accelerators, incubators, and innovation labs. A 3-year TSR analysis for the top-50 was used to avoid putting at a disadvantage new companies with high valuations that promised strong returns, but had not yet had a public offering. Start-up companies founded after 2001 that had a market capitalization of more than $1 billion and had an initial public offering from 2010–2012 were also included in the answers the executives provided. Ranking firms by their innovativeness has to balance hard data and subjective information that may derive from biased perceptions. However, a company that is perceived to be an innovator attracts new partnerships and talent, capital holders, and customers differently than does a company that is perceived to be more traditional. The BCG study did not offer any information on the diversity of the executives who responded. Thus, it provides no diversity elements that might introduce more insight into the opinions. While the study may have its limitations, it is important to note that there are few rankings available for global companies’ innovativeness, especially that have as consistent and structured a methodology as BCG’s. It is not only difficult to measure innovativeness accurately, but it is challenging to obtain access to senior-level executives to solicit their opinions. The BCG rankings had sufficient methodological rigor to fit with the research thrust of this paper. The limitations of the BCG rankings are noted, discussed, and addressed through the use of more objective and diverse metrics. The list of selected pulp and paper or bioeconomy companies was determined by reviewing their corporate annual reports and identifying those with the most revenue. Annual reports were analyzed from company websites. Once identified, the research focus was to best understand the firms’ innovation culture and operations, as well as to collect data on their board of directors’ composition and attributes. Each board member was analyzed using a variety of diversity and inclusion-related data. These data comprised 315 datapoints, including gender, age, education level and type, career background, and diversity of the discipline and experience. In instances where the company’s website provided insufficient information, additional web search tools were used to find other databases and reports to collect the desired information. For the purposes of this study the authors acknowledge the cross-cultural dynamics of different governance models and board composition across Anglo-Saxon, German, and Nordics models. The distinct difference between the Nordic model and the others is that the shareholders are more in control of the company, whereas the board and executive management are seen as the shareholders’ representatives in charge of running the company. The ensuing strict accountability to the shareholders, including hierarchical governance and strict division of directing executive management distinguishes the Nordic model. The other models are referred to as one- and two-tier-systems that are typical in countries with Anglo-Saxon and German traditions. In the two-tier system (German) there is a clear separation between the supervisory board and executive management. In this model, the shareholders play a very limited role in managing the company. In one-tier system companies (Anglo-Saxon), the board, together with executive and non-executive directors, serve both supervisory and executive functions. In US companies, this model also offers concentration of power, as the chairman of the board may also be the company CEO. Interestingly, in the one-tier system, the shareholders have more power over the board, at least theoretically. However, these companies’ highly dispersed ownership causes the shareholders to act as investors and not as engaged players in the running of the company.


Read More

Related Articles

Leave a Reply

Your email address will not be published. Required fields are marked *

Back to top button