The effects of the board on firm behavior: a dynamic capability perspective

In changing business environments, a firm requires dynamic capabilities to survive and grow over time, which rests on the engagement of the top management. To deploy dynamic capabilities, the top management draws on their dynamic managerial capabilities – that is, cognition, human capital, and social capital. These managerial capabilities enable the top management to shape and implement their firm’s dynamic capability deployment, and hence to improve firm performance. Even though both the top management and board of directors affect firm strategic decision making, the majority of existing research on dynamic capabilities has predominantly focused on the top management only, without explicitly considering the role the board plays in the top management’s decision making in the context of dynamic capability deployment. Therefore, in this thesis we examine how these two groups interact to advance our understanding of how dynamic managerial capabilities affect a firm’s dynamic capability deployment in efforts to improve firm performance and clarify how the board’s monitoring and service roles define this interaction. This thesis presents two papers The board plays an important role.  

The first paper offers a theoretical explanation of how different roles of the board affect dynamic capability deployment and ultimately firm performance. More specifically, by integrating existing understanding about dynamic managerial capabilities in combination with strategic leadership and governance research, we identify the controlling and service roles as the two main roles of the board influencing the way a top management’s dynamic managerial capabilities condition dynamic capability deployment. We explain in detail how these roles of the board either weaken or strengthen a top management’s impact on dynamic capability deployment. In doing so, we advance our current understanding of the dynamic capability framework by going beyond accounting for the role of the top management in the deployment of dynamic capabilities to explicitly accounting for the role of the board in this endeavor. This paper contributes to existing knowledge on dynamic capabilities by providing a better understanding (i) of how the management team, in consideration of the top management’s dynamic managerial capabilities and the board’s monitoring and service roles, affects dynamic capability deployment, and (ii) of the ways through which a top management affects dynamic capability deployment in consideration of the top management’s dynamic managerial capabilities as the main characteristics that condition a firm’s dynamic capability deployment proficiency, particular in breadth and depth. Additionally, (iii) our theoretical discussion clarifies how the monitoring and service roles of the board further affect this deployment of dynamic capabilities.  

The board plays an important role in influencing firm decision making. The board’s role in organizational decision making becomes even more important when a firm’s performance deviates from its aspirations as the board can provide beneficial resources and monitors the top management. Therefore, in the second paper, we empirically examine how the board influences – through providing resources to and monitoring the top management – firm decision making when a firm’s performance is above or below its aspiration level. Our core argument is that firms deploy dynamic capabilities to a greater extent when their performance falls below their aspiration level and to a lesser extent when their performance is above their aspiration level. In addition, we reason that the board’s roles condition these effects. To empirically assess these arguments, we analyze panel data of S&P1500 firms within a seven-year period from 2011 to 2017. We show how board monitoring may restrain firms in making decisions, thus weakening a firm’s dynamic capability deployment when the firm performs above its aspiration level. But we also identify that such monitoring strengthens a firm’s dynamic capability deployment when its performance is below aspiration level. We also demonstrate that, as the servicing role of a board provides access to additional resources, it strengthens the firm’s dynamic capability deployment when a firm’s performance is below or above its aspirational level. Hence, the board should provide more resources such as social ties, advices, and relevant experiences to the firm but monitor less when a firm’s performance falls below its aspiration level in dynamic capability deployment. Our paper’s contribution to performance-feedback research is to bring elements of board’s roles on the dynamic capability deployment into the study of the impacts of historical aspirations. In doing so, this paper sheds lights to existing knowledge about dynamic capabilities by investigating aspiration level performance as an internal trigger to understand firms’ decision making in deploying dynamic capabilities when their performance falls below aspiration level. Moreover, we contribute to the behavioral theory of the firm by exploring the impact of strategic leadership and governance, particularly of board roles in strategic decision making. We investigate how the servicing and monitoring roles of the board influence the firm in its decision making and actions, and thus contribute to clarifying which roles of a board increase or decrease a firm’s deployment of dynamic capabilities.