Is Weak Governance Always Bad? Governance and Competition Dynamics of Risk Aversion

Is weak governance bad for innovation? Reducing managerial accountability to performance is necessary to mitigate risk aversion and underinvestment in innovation, but it also increases the risk of lazy managers who seek a quiet life, resulting in a tension in the effects of improving governance on innovation. In explicating the tradeoff, we build upon research on the competitive dynamics of firm innovation and argue that risk aversion does not uniformly affect firm innovation at all times but increases in severity with relative firm performance, primarily afflicting managers of leader firms with little to gain from increased risk-taking. As a result, while decreasing overall innovation by exacerbating the quiet life, weak governance can increase (radical) innovation in a subset of leader firms that suffer the most from risk aversion. Our study demonstrates that a firm’s competitive position serves as a critical context under which risk aversion and agency conflicts take place.