CEO Tenure and R&D Investment

Abstract

This study examines the curvilinear CEO tenure–R&D investment relationship and the moderating influence of board capital on this relationship, thus making two major contributions. First, the finding of an inverted-U CEO tenure–R&D investment relationship enriches our understanding of how the CEO life cycle affects corporate investment decisions, particularly R&D. Second, the evidence of positive moderating effects of board human and social capital suggests that boards affect managerial choices through their human and social capital, thereby providing insight into how boards influence CEOs’ decision-making capabilities and, consequently, their R&D investment decisions. One important implication is that to encourage CEOs to invest in R&D, shareholders in the electronics industry and firms competing in innovation through R&D spending may consider appointing more directors with greater human and social capital to the Board because they will provide CEOs with ongoing advice and essential resources for R&D. The implications for strategy consultants are also discussed.

Keywords

R&D investment CEO tenure board human capital board social capital

Introduction

A chief executive officer (CEO) is an organization’s central decision maker and, as such, has the greatest power to make critical investment and resource allocation decisions (Barker & Mueller, 2002). Consequently, in today’s dynamic business environment, CEOs’ decisions contribute strongly to their firms’ relative success because of the need for rapid adaption to ongoing changes (S. Wu, Levitas, & Priem, 2005). According to the upper-echelons perspective (Hambrick & Mason, 1984), CEOs act based on their understanding of the strategic situations they confront. This understanding is significantly shaped by their tenure (Souder, Simsek, & Johnson, 2012), which mirrors their paradigms, skills, knowledge, and cognition orientation (Barker & Mueller, 2002; Richard, Wu, & Chadwick, 2009). In light of this argument, a significant body of research links CEO tenure to firm strategy (Barker & Mueller, 2002; Herrmann & Datta, 2006; Musteen, Barker, & Baeten, 2006); however, most of these studies have generally assumed a linear relationship.

This assumption of linear-only relationships may be problematic and thus limit our understanding of the more holistic construct of the CEO tenure–firm strategy relationship. Hambrick and Fukutomi (1991) suggest that new CEOs begin with a knowledge and power deficit and steadily learn while in their position, thereby expanding and refining their skill sets; however, in the later stages of their tenure, CEOs tend to become insular and overly wedded to long-held paradigms, thereby limiting their adaptability. Hambrick and Fukutomi’s theory implies that CEOs pass through two phases during their time in office: In the first phase, CEOs experience an initial period of adaptive improvement, and in the second phase, they become overly committed to existing approaches and tend to embrace the status quo (Henderson, Miller, & Hambrick, 2006).

Few articles have suggested that the influence of CEO tenure on firm inventiveness (S. Wu et al., 2005) and firm internationalization (Jaw & Lin, 2009) is likely to follow an inverted-U–shaped pattern, and little or no research has examined an inverted-U relationship between CEO tenure and research and development (R&D) investment. Investment in R&D is essential to survival, growth and long-term success for many firms in today’s competitive environment (Fong, 2010). However, R&D is also associated with a tedious process, uncertain returns, and complex tasks, and requires a scheme that enhances organizational members’ facilitation of the adoption of innovation, all of which place a firm’s resources at a level of risk that can easily exceed a CEO’s comfort level (S. Wu et al., 2005). Given the importance of a firm’s CEO to its strategy and success, the importance of R&D for firm competitiveness and long-term success, and the fact that an inverted-U shape represents an often overlooked relationship between CEO tenure and firm strategy, this study seeks to build on and extend this line of research by investigating how R&D investment, one of the most fundamental and important decisions made by CEOs, varies with the CEO life cycle pattern.

Although CEOs influence their firms’ R&D investment decisions, some previously unexamined contingencies, such as governance factors, may affect the CEO life cycle. While prior research in this area has primarily focused on constraints from the external environment (Henderson et al., 2006; Miller, 1991; S. Wu et al., 2005), research on internal governance mechanisms has been relatively sparse. It is difficult for firms to develop effective R&D capabilities and conceive of innovative strategies without effective guidance and sufficient resources (Dalziel, Gentry, & Bowerman, 2011). Additionally, the separation of ownership and managerial control in public corporations increases the organizational implications of the CEO–board relationship (Shen, 2003). Accordingly, boards of directors may serve as guardians and resource providers for R&D (Kor, 2006). Grounded in the resource dependence theory (Pfeffer & Salancik, 1978), some scholars have posited that board human and social capital shape how directors govern and offer advice to CEOs as well as affect the ideas and resources that directors provide (Dalziel et al., 2011; Hillman & Dalziel, 2003; Kor & Sundaramurthy, 2009). Therefore, this study introduces board human capital—directors’ CEO experience (i.e., directors’ experience serving as CEOs at other companies)—and board social capital—interlocking directorates (i.e., the board’s directorship ties to other firms)—as moderators to investigate how CEOs and their boards interact and what the implications of those interactions are for corporate R&D investment.

By partially replicating the work of S. Wu et al. (2005) that investigates the curvilinear CEO tenure–invention relationship under varying levels of technological dynamism, this research examines the curvilinear relationship between CEO tenure and R&D investment and the moderating influence of board capital on this relationship. Accordingly, this study should contribute to the existing literature in two ways. First, this study evaluates and tests an inverted-U–shaped tenure–R&D hypothesis, a rarely explored territory. While Although similar CEO life cycle hypotheses have been offered for CEO tenure and firm performance (Hambrick & Fukutomi, 1991; Miller & Shamsie, 2001) and other firm strategies (Jaw & Lin, 2009; S. Wu et al., 2005), this study combines previously discrete topics by investigating CEO tenure and R&D investment. Second, this study introduces board human and social capital as additional variables necessary for a more complete understanding of how a firm’s R&D investment decisions are made by its corporate leaders. Directors and CEOs play an integral role in choosing firm strategies, and they are responsible for resource allocation, performance, and increasing shareholder wealth (Minnick & Noga, 2010). Accordingly, the relationship between CEO tenure and R&D investment cannot be interpreted accurately without considering the influence of the board.

Theoretical Background and Hypotheses

In the following sections, this study first relaxes the frequent assumption of linear-only relationships, arguing for the curvilinear CEO tenure–R&D investment relationship, and then introduces board human and social capital as potential moderators of the effect of CEO tenure on R&D investment.

The Curvilinear CEO Tenure–R&D Investment Relationship

R&D investment, a precursor of innovation and entrepreneurial activity, is vital for gaining a competitive advantage and ensuring long-term success in many business contexts (Fong, 2010). To maximize returns on R&D investments and consequently increase innovation capability, a firm’s resources and capabilities must be marshaled by, motivated by, and continually focused on R&D activities (S. Wu et al., 2005), thus requiring an organizational culture for innovation and skills in managing the process of innovation (Jones, 2013). For instance, a firm has to (a) recruit employees who are committed to innovation to encourage flexibility and open-mindedness, (b) recruit experts (e.g., a team of scientists) in a new technology to develop new innovative products, (c) adopt a structure with norms and values that emphasize lateral communication and cross-functional cooperation to promote innovation, and (d) build new manufacturing facilities to make advanced products (Jones, 2013).

Because innovation that represents changes in relationships and power structure in organizations can be difficult to implement (Mone, Mckinley, & Barker, 1998; Musteen et al., 2010), organizational leadership for innovation is an important role for CEOs (S. Wu et al., 2005). Research grounded in the upper-echelons perspective (Hambrick & Mason, 1984) has suggested that CEOs generally build considerable social connections, power, status, and knowledge throughout their tenures (Jaw & Lin, 2009; Richard et al., 2009). However, R&D, a long-term investment with a high demand on resources and a high failure rate, may endanger the firm’s financial health, thus jeopardizing a CEO’s firm-specific knowledge, employment, and wealth (Kor, 2006; Souder et al., 2012).

Hambrick and Fukutomi (1991) propose five “seasons” of CEO tenure: response to mandate, experimentation, selection of an enduring theme, convergence, and dysfunction. Hambrick and Fukutomi also suggest that CEOs learn as their tenures increase, and they thereby expand and refine their repertoire of skills; however, in the later stages of their tenures, CEOs tend to commit to the paradigms that have brought past successes, a behavior that limits their adaptability. Consistent with the model, Miller and Shamsie (2001) assert that “the executive life cycle begins with the struggle to learn, progresses through increased competency, and, if leaders stay long enough, culminates in complacency and decline” (p. 727). These two studies posit that CEOs pass through two phases during their time in office: the first phase is an initial period of adaptive improvement, and the second phase is a period where CEOs become overly committed to their established paradigms and tend to embrace the status quo (Henderson et al., 2006).

Taken together, the above arguments suggest that R&D investments are particularly important but challenging tasks for CEOs, and as such, they provide an appropriate setting for examining the learning-based notion of the CEO life cycle, which captures not only the accumulation of knowledge, power, and commitments over time but also the eventual exhaustion of task interest and information diversity, thus leading to complacency (Souder et al., 2012). Contrary to most prior research, which assumes linear-only relationships, this study argues that a firm’s R&D investment varies with CEO tenure based on the CEO life cycle.

During the initial phase of their tenure, CEOs have a relative lack of internal and external networks, experiences, and knowledge about the firms and the industries (S. Wu et al., 2005), which limits their performance and ability to effectively notice, assess, and execute risks (Simsek, 2007). Accordingly, new CEOs’ efforts to promote R&D activities may be less than optimal, even if the CEOs willingly take risks and invest in R&D in an effort to demonstrate success to their stakeholders. Additionally, new CEOs’ power and discretion to undertake new initiatives are generally limited because the CEOs must adhere to the mandates primarily established by their boards to justify their selection for the job and gain acceptance within the firm (Souder et al., 2012). Facing a relative lack of power to mold the firm, new CEOs tend to be hesitant to pursue risky R&D strategies that jeopardize their positions (Jaw & Lin, 2009). For example, when Ian C. Read was appointed as the new CEO of Pfizer Inc. in December 2010, R&D expenses decreased by 3% in 2011 compared with 2010. The 2012 R&D spending would be reduced by as much as $2 billion from a planned $8 billion to $8.5 billion.

Further into their tenure, as CEOs’ concerns about their job security begin to wane (Souder et al., 2012), they tend to solidify their power (Brookman & Thistle, 2009), generate increased experiences (Herrmann & Datta, 2006), build and capitalize on their social capital, become familiar with the decision process, and develop a wealth and depth knowledge about their jobs, firms, and environments (Jaw & Lin, 2009). Accordingly, by the middle phase of their tenure, CEOs are better able to establish unity of purpose and synchronize their actions (Souder et al., 2012) and are thus more likely to commit more resources to and accept more risk from R&D.

However, as their time in the position continues past some intermediate point and CEOs begin to perceive their jobs as less interesting, they become complacent with their prior success and believe that they possess sufficient expertise and knowledge (Hambrick & Fukutomi, 1991; McClelland, Liang, & Barker, 2010). As such, CEOs gradually restrict their information processing and increasingly rely on familiar information sources (Musteen et al., 2006). As a result, they become stagnant and slow to adapt to environmental changes as they lose touch with their external environments (Miller, 1991). Accordingly, CEOs in advanced stages of their tenures ignore calls for strategic changes (Jaw & Lin, 2009) and tend to avoid high risk. As a consequence, they are less willing to pursue risky, long-term R&D investments that do not deliver quick returns (Barker & Mueller, 2002).

An example of a CEO’s R&D spending that appears as an inverted-U shape is Carleton S. Fiorina, who served as the CEO of the Hewlett-Packard Development Company (HP) between 1999 and 2005. During her tenure, HP’s R&D spending as a percentage of sales was 5.4% in 2000. It increased to 6% in 2001 and then decreased to 5.9% in 2002, 5% in 2003, and 4.5% in 2004.

In summary, CEOs begin their tenure with a limited ability to pursue R&D and then progress through a period of more aggressive R&D when the CEO has greater power and knowledge. Their tenure then culminates in lower R&D. As such, this study expects a curvilinear association between CEO tenure and R&D investment.

Hypothesis 1: There will be a curvilinear (inverted-U–shaped) relationship between CEO tenure and R&D investment.

CEO Tenure, R&D Investment, and Board Capital

The simple inverted-U shape is an incomplete representation of the influence of CEO tenure on R&D investment (S. Wu et al., 2005). Although CEOs influence their firms’ R&D investment decisions, some previously unexamined contingencies, such as governance factors, may affect the CEO life cycle. According to Pfeffer and Salancik’s (1978) resource dependence theory, boards that link the firm with its external environment can reduce uncertainty, communicate information between external organizations and the firm, facilitate access to resources, and aid in the formulation of firm strategy (Hillman & Dalziel, 2003). Prior research based on the resource dependence theory has suggested that boards have a profound effect on firm strategy as they influence managerial choices through board capital, which captures their ability to advise and provide resources (Haynes & Hillman, 2010; Kor & Sundaramurthy, 2009). Accordingly, this study introduces two elements of board capital—human capital and social capital—as potential moderators to further specify the CEO tenure–R&D investment relationship. These two elements differ from each other, as human capital refers to experience embedded within an individual, whereas social capital refers to the access to useful resources through networks of relationships. Both board human and social capital must be considered simultaneously because they are predicted to be the primary antecedents of board function fulfillment (Dalziel et al., 2011) and should therefore capture a more complete view of their abilities and resources in influencing CEOs’ R&D investment decisions.

Unstable environments, such as firms investing in R&D, are characterized by a relatively high level of unpredictable change or volatility, which places considerable information-processing and resource-marshaling demands on corporate leaders (Carpenter & Westphal, 2001). Accordingly, this study argues that boards with high levels of human and social capital will develop more effective information-processing capabilities and will have access to better-quality resources (Tian, Haleblian, & Rajagopalan, 2011). Accordingly, such directors help CEOs identify and assess environmental opportunities, provide CEOs with diverse and valuable perspectives, and assist CEOs in acquiring requisite resources for the pursuit of R&D (Kim, Burns, & Prescott, 2009).

Board Human Capital (i.e., Directors’ CEO Experience)

From a resource dependence perspective, boards of directors possess important human capital as they pertain to the provision of advice and counsel (Hillman & Dalziel, 2003). Human capital refers to an individual’s set of knowledge, skills, and abilities, all of which can be developed through work experience (Dakhli & De Clercq, 2004; Hillman & Dalziel, 2003). Accordingly, directors’ current and past professional experiences as CEOs (i.e., directors’ CEO experience) can be strong indicators of their human capital because such experiences not only shape their thinking, their frames of reference, and their perceptions but these experiences also allow these directors to develop tactical knowledge about and specific skills for the operations of firms and industries (Kor & Sundaramurthy, 2009). Because the experiences as CEOs improve their task expertise, directors enhance their ability to contribute to corporate strategy (Kroll, Walters, & Wright, 2008). Tian et al. (2011) suggest that directors’ CEO experiences are an important source of business expertise, and as such, they likely benefit the decision making of these directors.

Directors’ CEO experiences may provide CEOs with qualified support for R&D investment. As previously argued, early in their tenures, CEOs are less likely to invest in R&D because they lack experience and knowledge regarding the operations of the firms and the industries and accordingly less able to notice and manage risks. Experiences as CEOs at other companies, however, allows directors to develop expertise specific to the CEO’s job position, such as handling complex tasks, developing strategic visions, and making complex strategic decisions (Tian et al., 2011). Such direct experiences provide directors with essential insight into a firm’s unique resources and capabilities, which are necessary for the pursuit of innovation (Kor & Sundaramurthy, 2009) and the creation of organizational structures and systems that ease the development of R&D capabilities (Dalziel et al., 2011). Accordingly, experienced directors are capable of providing CEOs with diverse ideas and valuable insights and assisting them in detecting emerging opportunities and in developing strategic alternatives that lead to more creative and effective R&D strategies. The assistance of experienced directors may reduce CEOs’ perceptions of the uncertainties and ambiguities that accompany R&D and, as a result, increase the CEOs’ willingness to invest in R&D.

This article also argues that CEOs late in their tenure are less willing to assume risks and are constrained by prior successful routines and that, as a result, they are less willing to invest in R&D. Experienced directors with in-depth knowledge can better oversee and question CEOs’ decisions (Lo, Wong, & Firth, 2010), offer CEOs appropriate guidance (Kroll et al., 2008), and remind CEOs to focus on investments in long-term inventions (S. Wu et al., 2005). Dalziel et al. (2011) suggest that directors’ human capital ensures that managers do not underinvest in R&D. Additionally, CEOs late in their tenure tend to become bored with their jobs, which causes them to ignore their environment (Antia, Pantzalis, & Park, 2010), which in turn limits their information sources and their knowledge base (Herrmann & Datta, 2006). When directors possess the specific knowledge regarding CEOs’ tasks, the directors can speak a common language and effectively transmit tactical knowledge and outside information (Kor & Sundaramurthy, 2009), a factor that allows CEOs to recognize environmental changes, notice new opportunities, and assess risks, all of which increase their willingness to invest in R&D.

In line with the arguments and research above, the specific hypothesis is as follows:

Hypothesis 2: Board human capital will positively moderate the inverted-U relationship between CEO tenure and R&D investment.

Board Social Capital (i.e., Interlocking Directorates)

A lack of essential resources (e.g., information, knowledge, technology, and funds) may increase R&D risks (Raz, Shenhar, & Dvir, 2002), which consequently increases the risk of failure in innovation (Wincent, Anokhin, & Ortqvist, 2010). As previously discussed, novice CEOs are less likely to invest in R&D because they have relatively weak internal and external networks, which suggests that they have inferior tactical knowledge and that they do not have access to timely information. On the other hand, long-successful CEOs are also less likely to invest in R&D because they become complacent and tend to insulate themselves from outside environments. Thus, these CEOs’ searches for new practices may become narrow in scope as they are less able to adapt to environmental changes (S. Wu et al., 2005).

Social capital (also known as relational capital) refers to an individual’s ability to access resources through a network of relationships (Burt, 1992). From a resource dependence perspective, interlocking directorates developed via multiple board appointments may represent valuable board social capital because these directorates provide quick access to critical resources for R&D (Dalziel et al., 2011).

When serving on other corporate boards, directors build connectivity to other directors and executives (Nahapiet & Ghoshal, 1998), thus facilitating the communication, flow, and accumulation of relevant, high-quality information, and tactical knowledge (Carpenter & Westphal, 2001). This connectivity, in turn, enables the directors to assist CEOs in identifying and assessing environmental opportunities and directions for growth (Kor & Sundaramurthy, 2009). Castro, De La Concha, Gravel, and Periñan (2009) argue that interlocking directorates, bridging sources of new strategic information, and influential knowledge, can contribute to strategic decisions through counsel and advice provided to the CEO.

Additionally, the involvement of directors on other boards provides an important source of information with respect to business practices and policies (Carpenter & Westphal, 2001; Mizruchi, 1996) because such involvement exposes directors to a variety of strategic and governance issues that educate them about the diverse set of problems and the potential solutions that confront top executives and the boards (Beckman & Haunschild, 2002) and allow them to observe firsthand the decision-making process and the consequences of these decisions (Carpenter & Westphal, 2001). Thus, such directors are better able to develop a comprehensive view of strategic and management issues, which provides CEOs with valuable and diverse advice in coping with challenging R&D tasks and addressing R&D uncertainty (Kor & Sundaramurthy, 2009).

Moreover, interlocking directorates may assist CEOs in securing critical human and financial capital that fulfills R&D needs (Wincent, Anokhin, & Ortqvist, 2010). Key personnel are important for developing protocols that lead to successful innovations (Balkin, Markman, & Gomez-Mejia, 2000). Directors with board ties may help in hiring qualified top managers or talented employees (Tian et al., 2011) to support CEOs by reporting opportunities and problems and by sharing their own technological knowledge and information (H.-L. Chen & Huang, 2006). Additionally, although maintaining a continuous level of R&D is a critical activity as it sustains a firm’s ability to innovate (O’Brien, 2003), it is difficult for firms to develop effective R&D capabilities without sufficient funds (Dalziel et al., 2011). In this respect, well-connected directors may facilitate access to financial resources from outside the firm (Jackling & Johl, 2009), thereby reducing the R&D risk that results from financial constraint (H.-L. Chen & Hsu, 2009).

In line with the arguments and research above, the specific hypothesis is as follows:

Hypothesis 3: Board social capital will positively moderate the inverted-U relationship between CEO tenure and R&D investment.

Method

Sample and Analysis

To test the hypotheses, this study focuses on electronics firms listed on the Taiwan Stock Exchange Corporations between 2006 and 2010. The Taiwanese context is well suited for this study because Taiwanese firms often look to and use their boards to build legitimacy and obtain critical resources for new initiatives (W.-Y. Wu, Chang, & Chen, 2008; Young, Ahlstrom, Bruton, & Chan, 2001). The electronics industry is chosen because electronics firms enhance their manufacturing capabilities by focusing on applied research (Yu, Chiao, & Chen, 2005). In the analysis, panel data are used because the results take both structural changes and cyclical fluctuations into consideration (Frangouli, 2002). Therefore, a 5-year period (i.e., 2006–2010) is used due to the sharp reduction in the number of firms listed continuously on the Taiwan Stock Exchange Corporations over time (Himmelberg & Petersen, 1994).

To mitigate potential endogeneity (Y.-U. Chen, Huang, & Chen, 2009) and to allow for the desires and efforts of CEOs and directors to thoroughly affect the operations of the firm (Ahuja, 2000; S. Wu et al., 2005), the dependent variables (from 2007 to 2010) are regressed against independent variables, moderators, and control variables (from 2006 to 2009). Consequently, the final sample included 219 companies and generated 876 observations (219 firms × 4 years).

The financial data (including R&D expenditures, total sales, the number of employees, return on equity, and debt ratio), establishment date, institutional ownership, board size, and sales of a firm’s business segments are retrieved from the Taiwan Economic Journal Data Bank. Data regarding CEO ownership are manually drawn from the Taiwan Economic Journal Data Bank and are checked against and supplemented by companies’ annual reports. Data on directors’ CEO experiences, board members’ directorships at other firms, and the size of top management teams are manually retrieved from companies’ annual reports.

Measures

The R&D ratio, measured as the ratio of R&D expenditures to total sales, serves as the dependent variable in the analysis for two main reasons. The R&D to sales ratio is a widely used measure (Greve, 2003; Hansen & Hill, 1991). Additionally, rather than the absolute amount of R&D expenditures, the use of the R&D to sales ratio controls for size effects and heteroskedasticity, thus reflecting a firm’s commitment to innovative activity and permitting relative comparisons among firms (Hoskisson & Hitt, 1988). Furthermore, to eliminate any extreme outliers, this study uses log(R&D ratio + 1) (Fong, 2010; Minnick & Noga, 2010).

The independent variable is CEO tenure, measured as the total number of years since being appointed CEO (Barker & Mueller, 2002). This study also calculates and includes the square of tenure.

Board human capital and board social capital are the moderators in the analysis. Directors’ CEO experience is used as a proxy for board human capital and is measured as the percentage of board members who currently are, or previously had been, CEOs of other firms (Tian et al., 2011). Directors’ interlocking directorates serves as a proxy for board social capital (Haynes & Hillman, 2010; Wincent, Anokhin, & Ortqvist, 2010) and is calculated as the total number of board members’ directorships at other firms divided by board size (Jackling & Johl, 2009).

To control for firm, governance, and ownership effects on R&D investment, this study includes a series of control variables. First, firm size, represented by the logarithm of the number of employees, is controlled, as large firms may possess greater resources that are conducive to R&D (Barker & Mueller, 2002). Second, this analysis controls for firm performance, measured as return on equity, because some studies argue that unprofitable firms may reduce their R&D spending (Daellenbach, McCarthy, & Schoenecker, 1999), whereas other studies suggest that less profitable firms are more likely to experiment with innovative activity (Hitt, Hoskisson, Ireland, & Harrison, 1991). Third, leverage, measured as the ratio of total debt to total assets, is controlled because of the argument that R&D requires financial support, which means the likelihood of leverage being undertaken relies on the firm’s financial condition (Dalziel et al., 2011). Fourth, firm age, measured as the logarithm of the number of years a firm has been in existence (S. Wu et al., 2005), is included to control for the potential effects of a firm’s experience. Fifth, institutional ownership, measured as the ratio of shares held by institutions to total shares outstanding, is included, given the argument that institutional investors as a governance mechanism may influence R&D spending (Fong, 2010). Sixth, this analysis controls for CEO ownership, calculated as the ratio of shares held by the CEO divided by the total shares outstanding, because agency theorists have argued that significant stock ownership is one method of tying CEO wealth to maximizing shareholder wealth (Jensen & Murphy, 1990), thus encouraging CEOs to undertake risky, long-term R&D investments (Barker & Mueller, 2002). Seventh, because top management team size may affect the heterogeneity level of the team, it is included and measured as the number of members on each firm’s top management team (Kor, 2006). Eighth, given the argument that diversification leads to divisional structures in which division managers are evaluated based on financial controls that favor short-term performance maximization and, thus result, in underinvestment in R&D to attain better short-term performance, diversification is controlled (Barker & Mueller, 2002). Palepu’s (1985) entropy measure is used to measure diversification and defined as Σ_i(P_iln[1/P_i]), where P_i is the proportion of sales in business segment i and ln(1/P_i) is the segment weight. Ninth, this analysis uses subindustry and year dummy variables to control for all unmeasured subindustry and performance year effects.

Data Analysis and Results

Table 1 shows the descriptive statistics and the Pearson correlation matrix of variables used in the article. The mean of the R&D ratio after the logarithmic transformation is 0.60. The average tenure, that is, the number of years a CEO of the sample firms has held that position, is approximately 10 years. Board human capital, that is, the percentage of board members who currently are or had been CEOs of other firms, is approximately 28%. A value of 3.97 for board social capital indicates that the average number of directorships held by a director is 3.97. Additionally, the matrix shows modest correlations between the independent variables, thus suggesting that multicollinearity problems are unlikely. The analysis of the variance inflation factors for all variables also indicates that multicollinearity is not a problem.

Table 1.

Means, Standard Deviations, and Correlations.

Variables	Mean	SD	1	2	3	4	5	6	7	8	9	10	11	12
1. R&D ratio (log)	0.60	0.33	—
2. CEO tenure	10.19	8.94	0.04	—
3. CEO tenure-square	183.72	278.24	−0.01	0.95***	—
4. Board human capital	0.28	0.21	0.04	−0.07*	−0.04	—
5. Board social capital	3.97	3.31	−0.03	0.13***	0.14***	0.04	—
6. Leverage (%)	40.25	16.75	−0.46***	−0.12***	−0.08*	0.02	0.13***	—
7. Firm size (log)	3.29	0.67	−0.21^***	0.06	0.04	0.08*	0.16***	0.33***	—
8. Firm performance (%)	6.17	39.51	−0.04	0.04	0.02	0.06	0.05	−0.23***	0.15***	—
9. CEO ownership (%)	4.85	7.30	−0.06	0.16***	0.15***	−0.16***	0.02	−0.05	−0.06	0.05	—
10. Institutional ownership (%)	36.70	21.74	−0.06	−0.12***	−0.13***	0.08*	0.13***	0.04	0.33***	0.11**	0.05	—
11. Firm age (log)	1.29	0.21	−0.21***	0.30***	0.32***	−0.08*	0.00	0.10**	0.21***	−0.04	0.06	−0.20***	—
12. TMT size	5.23	2.93	−0.04	−0.05	−0.08*	0.13***	0.19***	0.18***	0.32***	0.05	−0.07*	0.18***	−0.01	—
13. Diversification	0.66	0.50	0.00	0.06	0.06	−0.03	0.01	−0.04	−0.09*	0.00	0.13***	−0.14***	0.11**	−0.03

Note. Number of observations = 876. R&D ratio = log([R&D expenditures/total sales] + 1), CEO tenure = total number of years since being appointed CEO, directors’ CEO experience = (number of board members who currently are, or previously had been, the CEO of another firm/board size), directors’ interlocking directorates = (total number of board directorships board members hold at other firms/board size), firm size = log(number of employees), firm performance = return on equity, leverage = (total debt/total assets), firm age = log(number of years a firm has been in existence), institutional ownership = (shares held by institutions/total shares outstanding), CEO ownership = (shares held by the CEO/total shares outstanding). TMT = top management team, TMT size = number of members on each firm’s TMT. Diversification = Σ_i(P_iln[1/P_i]), where P_i is the proportion of sales in business segment i and ln(1/P_i) is the segment weight.

p < .05. **p < .01. ***p < .001.

Table 2 reports the regression results. Hypothesis 1 predicts that peak R&D investment occurs midway in the job tenure cycle, with lower R&D investment occurring at both shorter and longer tenure points. Mathematically, this pattern could be mapped as an inverted-U–shaped function (Avolio, Waldman, & McDaniel, 1990). To test Hypothesis 1, this study first enters CEO tenure into a regression equation predicting R&D investment and then enters a CEO tenure-square term representing the quadratic function. If an inverted-U shape is observed for the relationship between CEO tenure and R&D investment, the CEO tenure-square term should account for increments in R², and the sign of the beta coefficient should be negative (Avolio et al., 1990; Kacmar & Ferris, 1989). As indicated in Model 2, the effect of CEO tenure on R&D investment is not significant, thus suggesting that linearity may not be the best representation of the form of the CEO tenure–R&D investment relationship. Model 3, on the other hand, includes a CEO tenure-square term and shows that CEO tenure-square is negatively significant at the 5% level and that the change in the adjusted R² of 0.28% between Model 2 and Model 3 is also statistically significant (Wald χ² = 4.66, p < .05). For the sample in this research, the negative quadratic term indicates that the positive relationship between CEO tenure and R&D investment diminishes at higher levels and that it may even become negative and form an inverted-U shape (Sturman, 2003), thus supporting Hypothesis 1.

Table 2.

Results of Regression Analysis.

Variable	Model 1	Model 2	Model 3	Model 4	Model 5	Model 6	Model 7
Intercept	1.2836*** (17.37)	1.2915*** (17.44)	1.2505*** (16.39)	1.2232*** (15.62)	1.2306*** (15.78)	1.2191*** (15.65)	1.2253*** (15.75)
Control variables
Leverage	−0.0079*** (−12.04)	−0.0077*** (−11.75)	−0.0076*** (−11.46)	−0.0076*** (−11.44)	−0.0077*** (−11.64)	−0.0076*** (−11.41)	−0.0077*** (−11.54)
Firm size	−0.0064 (−0.37)	−0.0082 (−0.47)	−0.0097 (−0.56)	−0.0108 (−0.62)	−0.0079 (−0.46)	−0.0159 (−0.92)	−0.0127 (−0.73)
Firm performance	−0.0009** (−3.56)	−0.0009** (−3.58)	−0.0009** (-3.64)	−0.0010** (−3.73)	−0.0010** (−3.77)	−0.0009** (−3.53)	−0.0009** (−3.60)
CEO ownership	−0.0021 (−1.60)	−0.0024 (−1.82)	−0.0025 (−1.91)	−0.0023 (−1.73)	−0.0019 (−1.41)	−0.0025 (−1.89)	−0.0021 (−1.62)
Institutional ownership	−0.0015** (−3.17)	−0.0015** (−3.04)	−0.0014** (−2.99)	−0.0015** (−3.09)	−0.0015** (−3.05)	−0.0013** (−2.68)	−0.0013** (−2.74)
Firm age	−0.2670*** (−5.36)	−0.2871*** (−5.57)	−0.2748*** (−5.31)	−0.2673*** (−5.14)	−0.2773*** (−5.35)	−0.2604*** (−5.03)	−0.2692*** (−5.19)
TMT size	0.0110** (3.07)	0.0111** (3.10)	0.0099** (2.76)	0.0087* (2.37)	0.0084* (2.29)	0.0084* (2.29)	0.0082* (2.25)
Diversification	0.0067 (0.35)	0.0070 (0.36)	0.0072 (0.38)	0.0061 (0.32)	0.0060 (0.31)	0.0083 (0.43)	0.0077 (0.40)
Main effects
CEO tenure		0.0016 (1.48)	0.0084* (2.53)	0.0091** (2.71)	0.0102** (3.04)	0.0115** (3.36)	0.0117** (3.43)
CEO tenure-square			−0.0002* (−2.16)	−0.0003* (−2.38)	−0.0003** (−2.80)	−0.0004** (−3.24)	−0.0004** (−3.30)
Board human capital				0.0616 (1.32)	0.0663 (1.43)	0.0488 (1.05)	0.0553 (1.19)
Board social capital				0.0027 (0.93)	0.0020 (0.70)	0.0021 (0.72)	0.0018 (0.61)
Moderated effects
CEO tenure-square × Board human capital					0.0005** (3.04)		0.0003* (2.00)
CEO tenure-square × Board social capital						0.0000** (3.22)	0.0000* (2.26)
Adjusted R² (in %)	34.37	34.46	34.74	34.79	35.41	35.49	35.72
Change in adjusted R² (in %)	N/A	0.09	0.28	0.05	0.62	0.70	0.93
Wald χ² (hypothesized variable)	N/A	2.19	4.66*	2.63	9.22**	10.35**	14.38**
F statistics	29.64***	28.06***	26.87***	24.34***	23.84***	23.92***	23.10***
Number of observations	876	876	876	876	876	876	876

Note. R&D ratio = log([R&D expenditures/total sales] + 1), CEO tenure = total number of years since being appointed CEO, directors’ CEO experience = (number of board members who currently are, or previously had been, the CEO of another firm/board size), directors’ interlocking directorates = (total number of board directorships board members hold at other firms/board size), firm size = log(number of employees), firm performance = return on equity, leverage = (total debt/total assets), firm age = log(number of years a firm has been in existence), institutional ownership = (shares held by institutions/total shares outstanding), CEO ownership = (shares held by the CEO/total shares outstanding). TMT = top management team, TMT size = number of members on each firm’s TMT, diversification = Σ_i(P_iln[1/P_i]), where P_i is the proportion of sales in business segment i and ln(1/P_i) is the segment weight. Subindustry and year dummy variables are included in the models. Numbers in parentheses are t statistics. The change in adjusted R² of Model 2 is relative to Model 1. The change in adjusted R² of Model 3 is relative to Model 2. The change in adjusted R² of Model 4 is relative to Model 3. The change in adjusted R² of Models 5, 6, and 7 is relative to Model 4.

p < .05. **p < .01. ***p < .001.

Hypothesis 2 proposes that board human capital positively moderates the relationship between CEO tenure–square and R&D investment. Model 5 shows that the interaction of CEO tenure–square and board human capital is positive and significant at the 1% level. The change in the adjusted R² of 0.62% between Model 4 and Model 5 is also statistically significant (Wald χ² = 9.22, p < .01). This result supports Hypothesis 2 and implies that a board with greater human capital (i.e., a higher percentage of board members who currently are or had been the CEO of another firm) is more capable of overseeing CEOs and providing CEOs with tactical knowledge, experience, and external information, consequently enhancing CEOs’ decision-making capabilities and reducing their perceptions of R&D uncertainty, which ultimately leads CEOs to invest more in R&D.

Hypothesis 3 proposes that board social capital positively moderates the relationship between CEO tenure-square and R&D investment. Model 6 indicates that the interaction of CEO tenure–square and board social capital is positive and significant at the 1% level. The change in the adjusted R² of 0.70% between Model 4 and Model 6 is also statistically significant (Wald χ² = 10.35, p < .01). This result supports Hypothesis 3 and suggests that a board with greater social capital (i.e., a larger number of directorships held by directors) is better able to facilitate access to requisite resources, which in turn reduces R&D risks resulting from a shortage of resources, and ultimately increases CEOs’ willingness to invest more in R&D. The results of Model 7 show that the findings are qualitatively identical if the two interaction terms are added simultaneously. The change in the adjusted R² of 0.93% between Model 4 and Model 7 is also statistically significant (Wald χ² = 14.38, p < .01).

Sensitivity Tests

This study conducts several robustness checks for the regression results. A different R&D indicator, the ratio of R&D expenditures to total assets, is used. The unreported results of the analysis of R&D/assets are qualitatively identical to those reported in Table 2. This study also tests the sensitivity of the control variables for different measurement results. Firm size is measured as the log of total assets (H.-L. Chen & Huang, 2006). Leverage is measured as the ratio of the book value of total debt to the market value of the equity and book value of debt. A log transformation log[leverage/(1 − leverage)] is used to avoid problems associated with situations where a large number of observations is close to either of the extreme values (Balakrishnan & Fox, 1993). Firm performance is assessed by return on assets (Barker & Mueller, 2002). This unreported analysis also yields results similar to those in Table 2.

Discussion

The theoretical arguments and empirical findings reveal the following: (a) there exists an inverted-U-shaped relationship between CEO tenure and R&D investment, which is consistent with previous life cycle hypotheses (Hambrick & Fukutomi, 1991; Miller & Shamsie, 2001) and with findings regarding the influence of CEO tenure on other firm strategies (Jaw & Lin, 2009; S. Wu et al., 2005) and (b) there exist positive moderating effects of board human and social capital on the CEO tenure–R&D investment relationship, which is based on the resource dependence logic that directors’ backgrounds and relationships may enable directors to question, assess, inform, and influence managers’ decisions and actions (Kim et al., 2009).

Although this study focuses on R&D investment, the theory that CEO tenure and board capital affect how much is spent on R&D should also apply to CEO and board support for organizational change efforts. This article contributes to the existing literature in two ways. First, most prior research has assumed a linear relationship between executive tenure and firm strategy (Barker & Mueller, 2002; Herrmann & Datta, 2006; Kor, 2006; Musteen et al., 2006; Simsek, 2007). However, top executives’ paradigms, repertoire of skills, knowledge, and cognition orientation may evolve with their time in office (Richard et al., 2009; Souder et al., 2012). Accordingly, this study seeks to build on the life cycle hypotheses (Hambrick & Fukutomi, 1991; Miller & Shamsie, 2001) and extend this line of research by empirically testing an inverted-U relationship between CEO tenure and R&D investment. The findings of this study should advance our understanding of how CEOs experience the life cycle of their tenure, which in turn affects their investment decisions.

Second, this is one of the first articles to examine the moderating influence of board human and social capital on the CEO tenure–R&D investment relationship. The relationship between CEO tenure and R&D investment is far from simple; therefore, previously unexamined contingencies should be considered. Although CEOs have an effect on corporate R&D investment, they are also subject to certain governance mechanisms that provide guidance and resources. Shen (2003) suggests that the separation of ownership and managerial control in public corporations emphasizes the important organizational implications of the CEO–board relationship. Dalziel et al. (2011) argue that directors, via their human and social capital, influence governance on R&D budgets. Accordingly, this article introduces board human and social capital as moderators to predict how CEOs and their boards interact in shaping R&D investment decisions. Accordingly, this study addresses the issue regarding how board capital shapes a board’s advisory and resource-provision functions, which consequently enhance CEOs’ decision-making capabilities and ultimately influences their strategic decisions, such as R&D investment.

Implications for Practice

Investment in R&D is necessary for firms that pursue innovation (Dalziel et al., 2011), and innovation is a major source of strategic and organizational change (Musteen et al., 2010). The problematic issues addressed in this study include how CEO tenure affects a firm’s R&D investment and how board capital influences CEOs’ R&D investment decisions. The present findings suggest that CEOs early or late in their tenure tend to invest less in R&D and that board directors with greater human and social capital should motivate CEOs toward R&D by providing them with advice and essential resources. Accordingly, this research has several implications for CEOs and boards of directors in the electronics industry, firms pursuing innovation through R&D investment, and firms seeking change by creating something new for their customers.

The findings that CEOs early or late in their tenures tend to invest less in R&D suggest that CEOs should be aware of their tenure and how it may affect their R&D investment decisions. CEOs, particularly those who are late in their tenures, tend to emphasize stability and avoid high risk as they lose touch with their external environment (Barker & Mueller, 2002); therefore, they ignore calls for strategic change (Jaw & Lin, 2009). Additionally, such CEOs become increasingly powerful (Musteen et al., 2010). Tang, Crossan, and Rowe (2011), having shaped thinking on power and politics, note that CEOs with dominant power tend to actually do harm to firms as the top managers or other employees may not feel comfortable providing suggestions to such CEOs. The above tendencies may lead to negligence on the part of the CEO with respect to R&D investment, thereby impairing an organization’s innovation capabilities and long-term development. Accordingly, over time in their position, CEOs must remind themselves not to neglect the importance of R&D investment and innovation because of those tendencies associated with their long tenures.

The inverted-U-shaped tenure–R&D relationship also implies that boards may need to be particularly vigilant regarding R&D activities for CEOs both early and late in the tenure of the CEOs. The finding with respect to the moderating effects of board human and social capital further suggests that board directors with high levels of human capital (directors’ CEO experience) and social capital (interlocking directorates) have more effective information-processing capabilities and have greater access to timely information and critical resources (Tian et al., 2011) than do those board directors with less human and social capital. Directors with these higher levels of capital may act as guardians and resource providers to encourage CEOs to invest in R&D that benefits a firm’s long-term success and shareholder interests. Because board capital could alleviate the negative influence of CEO tenure on R&D investment, shareholders, in their selection of board members, must consider nominating directors with more CEO experiences or directors whose appointments would create connections to external environmental actors in various areas for outside resources.

When R&D investment is not enhanced by communication and cooperation between the CEO and the board, a firm’s ability to develop innovative capabilities, produce innovation (Dalziel et al., 2011; Kor, 2006), and engender change (Musteen et al., 2010) is negatively affected. Although the findings emphasize that it is important that the board directors provide timely information and critical resources, this research further implies that CEOs maintain healthy dialogues and good relationships with their boards to facilitate their (the CEOs) access to complex information and tactical knowledge from their directors, thereby enhancing the formulation, initiation, and implementation of R&D.

In addition to board directors, strategy consultants who serve as external change agents can also provide CEOs (particularly late-tenure CEOs losing contact with their organizations’ environments and having a relatively limited information and knowledge base) with divergent, fresh insights and timely information (Armenakis, Harris, & Mossholder, 1993) about environmental events, technological, or customer trends and new modes of competition, all of which allow CEOs to gain insights into environmental opportunities and the urgency of change through innovation and R&D investment. As a result, CEOs will focus on R&D activities and attempt to alter organizational policies and patterns of operating to help the organization shape its goal (Landau, Drori, & Porras, 2006).

Furthermore, strategy consultants can help CEOs diagnose an organization’s problems and suggest solutions (Jones, 2013). As attitude toward change becomes more conservative over the course of a CEO’s tenure (Musteen et al., 2006), strategy consultants can suggest CEOs to find a trusted colleague who can keep them rooted in reality and accept new ideas (Higgs, 2009; Maccoby, 2000). The sidekick can remind his or her CEO to be conscious of the essentiality of innovation and get the CEO to accept the innovation strategy by showing how it fits the CEO’s view and serves the CEO’s interests. As a result, the CEO may become very likely to invest in R&D and carry out other positive changes that should be made, such as developing structures and administrative processes required for innovation and encouraging organizational members to develop new perceptual frames for innovation (Hage & Dewar, 1973). For instance, William (Bill) Gates, chairman of Microsoft Corporation, “can think about the future from the stratosphere because Steve Ballmer, a tough obsessive COO, keeps the show on the road” (Maccoby, 2000, p. 76).

To influence CEOs’ open-mindedness, strategy consultants can also advise CEOs to attend some programs of renewal and education, such as retreats and executive institutes. Such programs allow CEOs, especially those who have been in their position for an extended period of time, to surmount the tendency to cling to formulas that have worked well in the past by maintaining a capacity for uneasiness, skepticism about the status quo, and curiosity (Hambrick & Fukutomi, 1991). As CEOs have favorable attitudes toward innovation, they are very likely to spend money on R&D and establish and maintain organizational climate for change and innovation (Damanpour & Schneider, 2006; Hage & Dewar, 1973).

Limitations and Research Directions

This study recognizes that the findings in this article are subject to several limitations and thus suggests directions for future research. First, this study investigates only one industry, that is, the electronics industry. Studying a single industry helps control for industry effects (Ahuja, 2000) but limits the possibility of generalizing the findings to other industries. Similar studies in other industries should be encouraged to confirm the boundaries of the theory explored in this research.

Second, in keeping with much of the board literature, this study relies on data from companies’ annual reports to measure human and social capital. However, the annual reports provide only a brief biography of each director. Future studies may incorporate other data collection techniques, such as interviews with directors, to more specifically assess the various experiences and relationships of directors.

Third, because of the unavailability of relevant data, this study does not distinguish between CEOs who are also founders/owners or chairpersons and those who are not. Buyl, Boone, Hendriks, and Matthyssens (2011) argue that CEOs who are also founders of the firms combine positional power (they are the CEO) and ownership power (their status as founder) accordingly have more formal power than nonfounding CEOs. Additionally, some previous studies suggest that holding multiple titles while in the chief executive office may enhance that individual’s power (Daily & Johnson, 1997). For instance, Galema, Lensink, and Mersland (2012) argue that CEOs who also serve as chairperson of the board are more powerful and may thus use their formal position to determine strategic decisions and outcomes. Taken together, CEOs who are also founders/owners or chairpersons may have greater influence with respect to R&D investment than those who do not hold such titles. Future studies can be enriched if researchers could obtain data on CEO status as founder or as a relative of the firm’s founder as well as on the multiple titles held by firms’ CEOs.

Fourth, this study follows prior research (Chiang & He, 2010; Ferris, Jagannathan, & Pritchard, 2003) and uses firm size as a control variable. Research has documented that firm size affects the governance mechanism and the effects of that governance (Chiang & He, 2010). Ferris et al. (2003), for example, suggest that firm size influences the number of directorships held by a director, a factor that, as a consequence, affects firm performance. Accordingly, the moderating effect of board capital on R&D investment may differ in companies of different sizes. Although using firm size as a control variable is consistent with past studies, future studies that further investigate the effect of firm size on the selection of board members may likely provide more insight on the relationships between board capital, CEO tenure, and R&D investment.

Fifth, competitive conditions, such as first-mover advantages, that may affect a firm’s R&D investment are not included in the analysis because of the difficulty in collecting pertinent data. Lawson, Samson, and Roden (2012) argue that firms can establish the assets necessary to profit from innovation by taking advantage of being the first mover through preemptive access to technological space and that the ability to move down the learning curve to leverage the process and product innovation enables the first mover to impede competitors’ competitive reaction by increasing imitation cost, time, and effort. Accordingly, first-mover advantages may encourage firms to innovate and spend money on R&D. This study suggests that future researchers consider using the survey instrument to obtain pertinent data, such as lead time and moving quickly down the learning curve to measure first-mover advantages.

Sixth, a firm’s R&D investment levels may depend on the firm’s current level of spending and the risks associated with greater investment. However, most companies are unlikely to disclose their current levels of spending due to confidentiality reasons. It is also difficult to collect or measure the risk associated with greater investment for each company. Future studies can be enriched if researchers could obtain pertinent data.

Footnotes

Acknowledgements

I thank Editor William Pasmore, Associate Editor Jean Bartunek and two anonymous JABS reviewers for their valuable suggestions related to the revision of the manuscript.

Declaration of Conflicting Interests

The author declared no potential conflicts of interest with respect to the research, authorship, and/or publication of this article.

Funding

The author disclosed receipt of the following financial support for the research, authorship, and/or publication of this article: The author received financial support for the research from Taiwan’s National Science Council (NSC 101-2410-H-327-014).

Author Biography

Hsiang-Lan Chen is Associate Professor at the Department of Finance at the National Kaohsiung First University of Science and Technology. Her research interests include corporate investment and financing decisions, ownership structure, boards of directors and CEO/TMT characteristics. She serves of the review board of the Family Business Review and the editorial board of Advances in Management and Applied Economics.

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