The Effects of Directors’ Exploratory, Transformative and Exploitative Learning on Boards’ Strategic Involvement: An Absorptive Capacity Perspective
Author | Silke Machold,Aud Schønning,Morten Huse,Axel Walther |
Published date | 01 September 2019 |
Date | 01 September 2019 |
DOI | http://doi.org/10.1111/emre.12186 |
The Effects of Directors’Exploratory,
Transformative and Exploitative Learning on
Boards’Strategic Involvement: An Absorptive
Capacity Perspective
AUD SCHØNNING,
1
AXEL WALTHER,
2
SILKE MACHOLD
3
and MORTEN HUSE
4
1
VCC -Value CreatingCompetence, Skien, Norway
2
University of Witten/Herdecke, Witten, Germany
3
University of Wolverhampton, Wolverhampton, UK
4
BI Norwegian Business School, Oslo, Norway
While directors’knowledge representsa crucial resourcefor strategizing on boards,little is known how knowledge
of individual directors becomes deployedbehind the doors of the boardroom. Drawing on the concept of absorptive
capacity, we develop a model that explores how directors’explorative, transformative and exploitative learning
affects boards’strategic involvement. Using large-scale survey data, our findings indicate that learning helps to
explain how directors’knowledge leads to higher levels of strategic involvement. Moreover, we find that learning
processesmutually reinforce each otherand have complementary effectson boards’strategic involvement.Our study
contributes to the board and absorptive capacity literatures by demonstrating that learning processes are
interconnected with each other and represent an intermediate way to put directors’knowledge into effective use.
Introduction
Boards’strategic involvementrefers to the extent to which
boards engage in shaping the content, process, and
conduct of strategy (McNulty and Pettigrew, 1999), and
represents an important determinant of directors’
contributions to corporate value creation. Strategic
involvement has been shown to influence firms’decision
behaviors (Nielsen and Huse, 2010), including for
example organizational ambidexterity (Heyden et al.,
2015) and innovation (Torchia et al., 2011). Whereas
early studies were skeptical concerning directors’
contributions to strategy and there was a dearth of
knowledge regarding its antecedents (Pugliese et al.,
2009), more recent literature suggests that strategic
decisions greatly benefit from directors’industry-specific
knowledge (Kor and Sundaramurthy, 2009), experience
from serving as a top executive (Khanna et al., 2014)
and specialized task-specific expertise (McDonald et al.,
2008).
Yet the processes by which boards make use of
individual directors’knowledge have not yet been
completely understood. Process losses (Forbes and
Milliken, 1999) and cognitive constraints (Rindova,
1999) often prevent directors from applying their
knowledge in a strategic decision-making context. Forbes
and Milliken (1999) made an important distinction
between the presence and use of knowledge, arguing that
the latter requires high degrees of mutual respect and
collective learning among directors. While there is some
empirical support for this suggestion (Minichilli et al.,
2012; Zattoni et al.,2015), and research demonstrates that
directors who actively participate in strategic decision-
making tend to learn behavioral procedures more deeply
(Westphal and Zajac, 2013), not much theoretical
reasoning exists on how learning enables boards to
explore and transform their available knowledge and
apply it to strategictasks. Notwithstanding the few studies
Correspondence: Aud Schønning, VCC -Value Creating Competence,
Hynivegen 301, Skien, NO 3721 Norway. E-mail aud.
schoenning@gmail.com
DOI: 10.1111/emre.12186
©2018 European Academy of Management
European Management Review, Vol. 16, 683–616 , (2019 )
98
6
that adopt a learning perspectivein this context (Westphal
et al., 2001; McDonaldet al., 2008; Tuschke et al., 2014),
we have a limited understanding about how learning
processes relate to each other and affect board’sstrategic
decision-making in concert.
In this study, we ask the followingquestion: ‘How does
directors’exploratory, transformative and exploitative
learning affect boards’strategic involvement?’.
Theoretically, we draw on the concept of absorptive
capacity to explain how boards obtain, share, and apply
individual directors’knowledge to strategic matters.
Absorptive capacity refers to the ability to explore,
transform, and exploit new information and knowledge
(Cohen and Levinthal, 1990; Zahra and George, 2002)
and has been shown to be a valuable construct to explain
how firms make use of their resources for strategic
applications (Ebersberger and Herstad, 2011; Tortoriello,
2015). We argue that absorptive capacity and its focus
on knowledge gathering, sharing, and exploiting from
learning shares parallels with utilizing directors’
knowledge (Zahra et al., 2009), and allows for a finer-
grained explanation of how knowledge leads to strategic
involvement. Additionally, in line with the absorptive
capacity literature (Zahra and George, 2002; Todorova
and Durisin, 2007), we suggest that multiple learning
processes are mutually reinforcing (Lane et al., 2006),
and the joint adoption of all learning processes may be
greater than thesum of benefits obtained from theisolated
adoption of single ones (Milgrom and Roberts, 1995).
We test our arguments using large-scale survey data
from Norwegian boards. Norwegian boards tend to have
an active role inshaping the content, process, andconduct
of strategy (Zattoniet al., 2015) that can foster discussions
to absorb the knowledge of individual directors (Cadiz
et al., 2009). Our study makes two important
contributions. First, by introducing the concept of
absorptive capacity into research on boards, we provide
theoretical insights into how individual directors’
knowledge leads to higher levels of boards’strategic
involvement. The relatively sparse prior research on
learning in boards has focused on single sources of
learning such as interlocks (Tuschke et al., 2014), or
participation in strategic decision-making processes
(Westphal and Zajac, 2013), but rarely considered that
learning may be better understood as an ongoing process
of interrelated activities (Argote and Miron-Spektor,
2011). In support of this reasoning, our findings indicate that
exploratory, transformative, and exploitative learning
mediate the relationship between directors’knowledge and
boards’strategic involvement. Second, we contribute to
the absorptive capacity literature (Zahra and George, 2002;
Lane et al., 2006) by focusing on the effects of learning
processes at a group level. While firm-level antecedents
and consequences of absorptive capacity received much
attention (Flatten et al., 2011b), Volberda et al. (2010)
emphasize that a deeper understanding of absorptive
capacity requires reference to upper-echelons such as boards
of directors. Because scholars tend to treat absorptive
capacity as a static construct (Lane et al., 2006) and thereby
miss out on its richness and multidimensionality (Volberda
et al., 2010), we adopt a process view of absorptive capacity
and develop a model that explains how knowledge is
gathered, shared, and exploited at a group level
(Martinkenaite and Breunig, 2016).
Governance and boards in the Norwegian institutional
setting
Our theoretical framework and subsequent hypotheses are
developed and tested using large-scale survey data from
Norway. Norway is a small country in Northern Europe
and can be classified as a civil law country with a two-tier
corporate governance system. The Norwegian Code of
Practice for Corporate Governance shares many similarities
with codes in other European countries, including
recommendations concerning board structures as well as
the division of responsibilities among boards, shareholders
and management. Specifically, the Norwegian corporate
governance system is characterized by a tiered board
structure, concentrated ownership, and a strong regulatory
regime including mandatory employee representation on
boards (Rasmussen and Huse, 2011; Sinani et al., 2008).
We describe each of these aspects in turn.
Norwegian corporate law differentiates between
executivemanagers (most often the CEO) andsupervisory
boards. CEO duality (i.e., the practice of a single
individual serving as both CEO and board chair) is
prohibited in Norway, yet CEOs typically participate in
board meetings ( Grosvold et al., 2007). Norwegianboards
have comparatively high discretion concerning strategic
decision-makingand are expected to ‘lead the company’s
strategic planning, and make decisions that form the basis
for the executive man agement’(Norwegian Code of
Practice for Corporate Governance). Research
accordingly describes boards as active in strategic
decision-making (Machold et al., 2011) and particularly
influential in shaping firm performance (Lohe and
Calabrò, 2017; Zattoni et al., 2015).
A second characteristic of Norwegian corporate
governance is the prevalence of ownership concentration.
Like in most other European countries, ownership in
Norway is traditionally under the influence of a
controlling shareholder, with families and the state
playing the most important roles (Mishra et al., 2001).
Control is typically enacted through director selection as
well as pyramid and dual class shareholding (Sinani
et al., 2008). Boardsof directors are elected by the general
meeting of shareholders or, where applicable, by a
corporate assembly. Yet Norway has opened up
considerably to foreign and institutional investors since
684 A. Schønning et al.
©2018 European Academy of Management
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