Entrepreneurship in the Boardroom: Board Roles in Managing Innovation

Today’s competitive health care markets demand innovation and risk taking on the part of organizations. However, increased government regulation and stiffer penalties enacted in the wake of recent high -profile corporate scandals and the resulting Sarbanes–Oxley legislation, may render boards less willing to undertake entrepreneurial ventures. This article extends the typology of corporate entrepreneurship (CE) developed by Covin and Miles (1999) by extending the CE types to address governance activities in the health care sector. Four case studies are presented that illustrate each of the typology’s forms. In addition, the implications of the typology for health care executives and trustees are discussed and areas for future research are recommended. Article: The business world, stock markets, employees, and the U.S. government have been shaken by governance failures at corporate entities such as Enron, Tyco, Adelphia, and Worldcom. The health care sector has been no exception with HealthSouth exhibiting questionable governance oversight and offering little in the way of effective risk management to stockholders prior to its collapse. As a result of these failures, the U.S. Congress intervened quickly and with some fanfare by enacting the Sarbanes–Oxley Act in 2002, which mandated sweeping reforms in the governance policies of publicly traded companies’ boards. Although the legislation specifically targeted public firms, recent efforts by several states’ attorneys general indicate that a similar level of discontent is growing among those officials charged with overseeing the public benefit derived from nonprofit organizations. For example, the New York State attorney general, Elliot Spitzer, has demanded that nonprofit boards observe the basic organizational requirements of Sarbanes–Oxley (O’Brien & Spitzer, 2004). In Minnesota the attorney general has gone so far as to prompt the dissolution of the governing board of a large nonprofit, Allina, once regarded as a model for integrated delivery of health care (Reilly, 2003). The net effect of these activities has been to create an environment where health care organizations’ directors are playing a significantly larger role in strategic decisions and potentially limiting corporate entrepreneurship (CE) to curtail their own legal liability. The key features of Sarbanes–Oxley are increasingly well known to the public as a result of high profile investigations, notably HealthSouth. The most prominent feature of the law is the requirement that the CEO and CFO of a publicly traded entity verify the financial statements. In addition, governance ―best practices‖ under the law have also resulted in action to restructure the governance processes of not only publicly traded health care companies such as HCA and Tenet, but also their nonprofit counterparts. The law has reinforced awareness of the public accountability of trustees. Investment rating firms are increasingly demanding that organizations demonstrate strong board oversight to sustain creditworthiness. These requirements for increased control in some key areas are accompanied by demands for increased independence from trustee control (Hymowitz, 2005). For example, audit committees must comprise independent, outside financial experts. Investment committees must now be incorporated more completely into the governance process as they may recommend actions but not make or manage investments as was often true previously (Haugh, 2004). Orlikoff (2005) observes that rating agencies are using their power to demand improvement in governance. As a result, boards are increasingly called upon to do business in a more public manner with greater involvement of other actors. The net effect is to reinforce the conservative obligations of a trustee’s role to conserve the assets of the entity and avoid risk demanded in entrepreneurial settings. Corporate entrepreneurship, which embodies a company’s innovation, venturing, and risk management activities, is necessary in today’s competitive health care markets. However, increased governance regulation and stiffer penalties for trustees who fail to meet the new standards may reduce the willingness of many board members to endorse or allow entrepreneurial activities under their purview. Chiat (2004) has suggested that ―our current models of leadership – and governance – have elevated managers to leaders. Boards, as a result, often end up doing work that might be considered management. They look at budgets, they look at facilities plans, they develop market plans to improve their image or attract clientele. Boards have become legitimators, auditors, and custodians of tangible assets. But not leaders.‖ This is a severe indictment of the ability of the contemporary board to function in support of entrepreneurial activity by the organization. In order to study how boards manage CE it is necessary to have a framework that describes the phenomena in a systematic fashion. Previous research has focused on organizational innovation in conjunction with CE (Covin & Miles, 1999; Ahuja & Lampert, 2001; Lee et al., 2001) or studied board member’s ownership stake as it correlates to various levels of CE activity (Zahra, 1996). However, no research we have been able to identify specifically looks at the CE actions and policies taken by boards, either in the general management or health care literatures. To address this gap in the research, we extend the CE typology developed by Covin and Miles (1999) to reflect governance activities specifically. In addition, four case studies are provided that illustrate the different types. Lastly, how health care organization executives and trustees can apply the lessons learned from study is discussed. NEW CONTRIBUTION Building on existing concepts of CE and governance, this article suggests a new research agenda to increase the effectiveness of health care organizations’ oversight. Given the heightened interest in institutional governance by both the federal and state governments, it is likely that many board members will resist current or future CE activities at their institutions as a form of personal risk management. However, for those boards that can intelligently manage the risk associated with CE in the face of heightened external threats, there is an opportunity to seize sustainable competitive advantages in the marketplace. Therefore, this paper provides a starting point for board education on effectively restructuring their governance in accord with the demands of Sarbanes–Oxley. WHY HEALTH CARE ORGANIZATIONS? Nonprofit health care organizations provide an ideal context for studying CE for three reasons. First, in the past 20 years U.S. health care markets have undergone significant reorganization involving fundamental changes to organizational structures and stakeholder relationships that required extensive board involvement (Fottler et al., 1989). Therefore, nonprofit health care boards are active and engaged in the management of their organizations. Second, no board member holds an ownership position in a nonprofit firm, therefore potential agency conflicts are effectively controlled for from a CE research perspective. Lastly, health care delivery organizations’ boards are under increasing pressure by purchasers, employers, and governments to change their internal processes to improve quality and reduce medical errors (Kohn et al., 2000; Begun et al., 2003). CORPORATE ENTREPRENEURSHIP Corporate entrepreneurship is the term used to describe the innovative and risk-taking approaches that enterprises adopt to gain competitive advantage in their marketplaces. CE is deliberate, firm-level behavior through which organizations renew, reinvent or redefine themselves, their industries, their markets, or some combination of those factors. The CE designation is reserved for instances where the entire organization, not just individuals or small groups within the organization, acts in ways that would be characterized as entrepreneurial. As such, the CE construct is particularly useful when studying entrepreneurial activities in relationship to the governing board, the firm structure being ultimately responsible for approving organizational direction and strategy. Covin and Miles (1999) have developed a typology that classifies the four most commonly observed CE forms (see Table 1). The four forms are domain redefinition, strategic renewal, organizational rejuvenation, and sustained regeneration, which are arrayed in descending order from the riskiest and broadest in scope to the least risky and narrowest in scope. Each form is associated with a distinct entrepreneurial activity focus and serves a basis for gaining competitive advantage.