Family Executives' External Directorate Ties and Corporate Innovation in Taiwan's Electronics Industry: The Role of Controlling Family Agency Problems

Top management teams of family firms are often characterized as having less diversity and professionalism, which could limit corporate innovation. Based on the Resource Dependence Theory, to build external directorate ties is one approach to accessing different resources and information which can benefit firms' innovation. However, controlling families' external directorships may bring two distinct effects on firms due to, on the one hand, their strong needs for heterogeneous ideas and, on the other hand, the potential agency problems related to family firms. Given the prevalence of family firms in Taiwan's information and electronics industry, we first examine the relationship between family executives' directorate ties and innovation. Next, considering the controlling families' ownership structures, we further examine how the controlling family's agency problem affects the aforementioned relationship. Using a sample of family firms in Taiwan's information and electronics industry, we predict and find a positive association between the quality of family executives' external directorate ties and firms' innovation performance. Moreover, we find this positive association to be offset by controlling families' entrenchment incentives arising from their divergence between control and cash flow rights. These results imply that family firms with greater agency problems allow their family-member executives to accept at-will external directorships while ignoring firms' overall benefits.