Is board IT governance a silver bullet? A capability complementarity and shaping view

https://doi.org/10.1016/j.accinf.2019.03.002Get rights and content

Highlights

  • IT Governance by the board (an IT capability) can increase financial performance

  • IT operating capability (an IT-enabled capability) can increase financial performance

  • There is a suppression complementarity association between these two capabilities

  • IT operating capability is shaped by board IT governance and mediates the effect of board IT governance on financial performance

  • IT operating capability is shaped by board IT governance and mediates the effect of board governance on financial performance

Abstract

This article examines how the impact of Information technology (IT) governance by the board of directors on firms' financial performance can be mediated through IT operating capabilities, and how such board IT governance (B-ITG) can modulate the influence of IT operating capability on financial performance. Findings based on a survey of 89 corporate directors indicate that both B-ITG and IT operating capability increase financial performance. They further point to complex B-ITG effects on financial performance, including complementarity with and shaping IT operating capability. They show that high B-ITG suppresses the effect of IT operating capability on financial performance and that B-ITG effects on financial performance are partially mediated through IT operating capability.

Introduction

Information technology (IT) can produce business value (Ghasemaghaei et al., 2017), and this is the primary reason why firms invest in IT (Chan, 2000; Hitt and Brynjolfsson, 1996). IT governance (ITG) is a planning and oversight mechanism that governs the translation of IT investments into business value. ITG is defined as: “the leadership and organizational structures and processes that ensure that the organization's IT sustains and extends the organization's strategies and objectives” (IT Governance Institute, 2003, p. 10). It is the joint responsibility of executive management team (e.g., the CIO or CEO) and the board of directors (IT Governance Institute, 2003, p. 10; De Haes and Van Grembergen, 2009). While most ITG studies have focused on executive-level ITG (ITG exercised by the executive team) (e.g., Ali et al., 2012; Bowen et al., 2007; Prasad et al., 2012), literature on board-level ITG (B-ITG, i.e., ITG exercised by the board of directors) has been sparse (Jewer and McKay, 2012). Nevertheless, recent studies unanimously show that B-ITG is an important component of overall ITG (Nolan and McFarlan, 2005), and that it can increase firms' financial performance (Turel and Bart, 2014). Hence, the relatively isolated focus on executive-level ITG limits our understating of ITG and its impacts.

B-ITG is: “the board's actions to ensure that the organization's IT sustains and extends the organization's strategies and objectives” (Turel and Bart, 2014, p. 224). Given its potential to improve various aspects of firm performance (Jewer and McKay, 2012; Turel and Bart, 2014; Turel et al., 2017), calls have been issued for setting a stand-alone board IT committee (Nolan and McFarlan, 2005). However, more than a decade later, only a small number of boards have done so. For this study, we checked the existence of IT committees in Standard & Poor's 500 companies. Our findings indicate that as of 2018 only 4.4% of listed companies had a board-level IT committee. This may not be indicative of the existence of IT governance efforts, but is certainly informative regarding the emphasis boards put on ITG. In contrast, over 80% of Standard & Poor's 500 companies had CIO or CTO positions. This difference may reflect the common misperception that IT is an operational matter and as such, should not concern the board (Turel et al., 2017). This gap seems to be out of step given the increased strategic importance of IT and the growing risks presented by IT.

There also seems to be a large gap between the academically-claimed benefits of B-ITG and the low emphasis on B-ITG in organizations (Turel et al., 2017). This represents a “board ITG paradox”: low-level or no B-ITG does not seem to be associated with apparent poor or inferior firm performance. This paradox suggests that B-ITG influence may be contingent on other IT-related capabilities or situational factors. Focusing on these capabilities, we raise the research question: Does the interplay of B-ITG with other IT-related capabilities matter for financial performance? The objective of this study is to examine this question.

To address this question, we rely on the resource-based view (RBV) of the firm (Wernerfelt, 1984) and apply the concept of capability complementarity (Helfat, 1997). This theoretical perspective assumes that B-ITG is a special type of IT capabilities that can complement other capabilities (Turel and Bart, 2014). The other capability this study emphasizes is firm-level IT operating capability, defined as the ability of a firm to effectively and adequately use IT tools and functions to support ordinary processes and operations (Ravichandran and Lertwongsatien, 2005). This complementary capability choice is driven by three prime reasons. First, IT operational excellence drives firm performance (Subramani, 2004; Tippins and Sohi, 2003). Second, IT operating capability exists, to some extent, in all types of organizations, even when they do not have an IT unit. Third, IT operating capability may be influenced by, and complement B-ITG. In other words, IT operating capability may help translating B-ITG effects into financial performance.

Specifically, we posit that B-ITG represents an upper-echelons capability that complements and shapes firm-level operational capabilities related to IT, and that through this interplay it influences financial performance. This perspective extends the RBV in IT contexts by (1) better explaining the complex effects of B-ITG on financial performance, and (2) showing that capability complementarity matters and should be considered in future RBV research. It can also address the abovementioned paradox, and explain why some firms with low B-ITG emphasis still perform well. We test the proposed model with data collected from 89 board members (directors). The findings indicate that B-ITG and IT operating capability are two important predictors of financial performance. The results also extend main-effect findings by showing that capability complementarity exists between B-ITG and IT operating capability, and that when IT operating capability is strong, it can reduce the effect of B-ITG (at least temporarily) on financial performance.

Section snippets

Theoretical background

This section provides a literature review of B-ITG, the IT capabilities we focus on, and the concept of capability complementarity.

Hypotheses

The proposed research model (Fig. 1) is rooted in the RBV of the firm, combined with Black and Boal's (1994) typology of complementarity, and operationalized with Benitez-Amado and Walczuch's (2012) moderation and mediation hypotheses of two IT capabilities. It posits that B-ITG and IT operating capabilities increase the firm's financial performance, but that they do so differently. While IT operating capability directly drives financial performance, B-ITG directly and indirectly influences

Methodology

We used a paper-based survey to collect data about the main constructs, control variables and descriptive variables, including the industry in which the organization operates (e.g., advanced technology, banking, chemicals), board roles of respondents (e.g., chair, vice chair), number of boards participants serve on, and the age of the organization (see Appendix A).

We administered the survey to 708 directors who attended general corporate director governance training programs in Canada and the

Analysis and results

Descriptive statistics, correlations and reliability measures (for multi-item constructs) were calculated (see Table 3).

Discussion

The study sought to address the research question: Does the interplay of B-ITG with other IT-related capabilities matter for financial performance? It was addressed by showing a suppressing complementarity relationship between B-ITG and IT operating capability and a complex set of direct and indirect influences of B-ITG on financial performance.

Conclusion

The increased dependency of organizations on IT for operation and success has pushed researchers and practitioners to examine to what extent boards of directors should get involved in IT matters, and to examine the roles of B-ITG in obtaining financial gains. This study provides one explanation regarding the “board ITG paradox” by showing a suppression complementarity: when operating capability is high, B-ITG may be less needed (at least temporarily, until industry dynamics require changes).

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