Outside Directors on the Board and Innovative Firm Performance

We investigate how outside directors on supervisory boards influence innovative activities of the firms they advise and monitor. Based on panel data on the largest German companies, the econometric analysis shows a positive influence of external executives on innovative firm performance, measured by patent applications. Differentiating between outside directors from innovative and non-innovative companies reveals that only outside directors from innovative firms increase patenting activities at the firms they advise and monitor. This effect increases with the technological proximity between the appointing firm and the outsider's home firm. Outside directors from non-innovative firms are negatively associated with the appointing firm's innovativeness. The results indicate that external executives with an appropriate professional background can provide valuable specific knowledge and expertise to the board.