Beyond Diversity: A Tale of Faultlines and Frictions in the Board of Directors

Abstract

Various regulatory governance initiatives have strived for board diversity, as diversity stimulates creativity, encourages discussion, and enlarges the board's knowledge base. However, increased diversity results in superior decision-making only when the board is free from conflicts and acts as a cohesive group. In this paper, we extend existing corporate governance research by introducing faultline theory to the board of directors (Lau and Murnighan 1998). The idea is to show how a board's diversity structure can give rise to the formation of subgroups along faultlines. The resulting subgroup formation may, in turn, reduce board effectiveness. Using a sample of U.S.-listed firms between 2008 and 2012, results suggest that boards with strong faultlines are associated with lower firm performance, lower CEO turnover-performance sensitivity, and higher abnormal CEO compensation. Understanding potential unintended consequences of board diversity could be of interest to regulators and companies that plan to appoint new directors to the board. JEL Classifications: G30; G38; D70; M41.

Gender Faultline Strength on Boards of Directors and Strategic Change: The Role of Environmental Conditions

“…The degree of faultline is the product of subgroup internal alignment and CGAI. While subgroup internal alignment signifies the extent to which all individuals within a subgroup are similar to one another on all other relevant demographic characteristics (Tuggle, Schnatterly, & Johnson, 2010), CGAI denotes the extent to which subgroups formed along the faultline diverge (Van Peteghem, Bruynseels, & Gaeremynck, 2018). Each dimension captures a different aspect of a team.…”

International Top Managers on Corporate Boards: Dissimilarity and Tenure

“…Faultlines appear when a group consists of various subgroups that differ in terms of demographic characteristics (Lau and Murnighan 1998;Li and Hambrick 2005;Ou et al 2017). Prior research has argued that faultlines within boards, for instance between the CEO and the TMT, may have negative consequences on strategic change or firm performance (see, for instance, Richard et al 2019;Van Peteghem et al 2018). With the present paper, we take a step back and show that dissimilarities in demographic characteristics also create faultlines between the individual top manager and his or her fellows on the board-with negative outcomes for the individual, i.e., a top manager's tenure on the board.…”

Chief Executive Officer Dismissal: A Multidisciplinary Integration and Critical Analysis

“…Interestingly, dysfunction within the board may also deter monitoring and insulate the CEO from dismissal. Indeed, Van Peteghem, Bruynseels, and Gaeremynck (2018) found that fault lines within the board decrease dismissal likelihood. In short, when boards are more powerful than the CEO, they are better positioned to dismiss the CEO when they choose; when boards are relatively weaker, dismissing the CEO becomes much more difficult (Buchholtz, Young, & Powell, 1998; Pearce & Zahra, 1991).…”

“…For example, faultlines—attribute-based group divisions (Lau & Murnighan, 1998)—within the TMT could create dysfunction within the leadership of the firm. While faultlines within the board have been found to reduce effectiveness and decrease the likelihood of CEO dismissal (Van Peteghem et al, 2018), the relationship between CEO dismissal and faultlines within the TMT has yet to be examined. Indeed, faultlines among the TMT would seem to have the opposite effect: facilitating dismissal by increasing dysfunction within the upper echelons of the firm.…”