Board Task‐related Faultlines and Firm Performance: A Decade of Evidence

Abstract

Manuscript Type: EmpiricalResearch Question/ Issue: To what extent can group faultlines and their potential valuedestroying effects be detected on corporate boards? Task-related attributes of the type of directorship, education, board tenure and financial background of board members are considered as directors' characteristics that give rise to the faultline phenomenon. The impact of task-related faultlines on firm performance as well as the moderating effects of busy boards, Chief Executive Officer (CEO) tenure, executive directors' (EDs) compensation structure, and the average nonexecutive directors' (NEDs) involvement in board committees are examined. Research Findings/ Insights: Using a panel of FTSE 350 companies from 1999 to 2008, we find a strong negative effect of task-related faultlines on firm performance. Further exploration of the moderating effects demonstrates that the condition of a busy board and the CEO tenure exacerbate the negative effects of faultlines. At the same time, the executive pay-contingency is found to have a remedying effect on boardroom cohesiveness, whereas the involvement of NEDs in board committee work is not likely to make the adverse effects of board faultlines less pronounced. Theoretical/ Academic Implications: Based on the arguments of the identity and social identity theory, this study shows that task-related faultlines on corporate boards have strong negative value-creating implications. The positive moderating impact of the executive compensation structure renders support to agency theory predictions about executive incentive alignment. This work also underlines the usefulness of the concept of faultlines in the corporate governance literature, because the unitary boards, where NEDs and EDs come to work together, exhibit preexisting factions, similar to top management teams of family-controlled firms and teams managing international joint-ventures. Practitioner/Policy Implications: This research points to the importance of the careful selection process of directors by the nomination committees. It also underlines the role for active leadership on boards, who should be aware of available strategies to ameliorate the negative consequences of board splits, such as accentuating superordinate board identity and/ or informal meetings. words

Who's the Boss at the Top? A Micro‐Level Analysis of Director Expertise, Status and Conformity Within Boards

“…Financial expertise is recognized by board scholars as an important capability for directors (Davis, 2009;Johnson et al, 2013;Kaczmarek et al, 2012). For a large part, the monitoring activities of directors hinge on their understanding of financial matters and requires knowledge of accounting and internal controls standards and concepts (DeFond et al, 2005;Dhaliwal et al, 2010).…”

CEO Characteristics and Internal Control Quality

“…Miller (1991) argues that CEO autonomy, tenure and past performance, gestalts, momentum, and convergence may all lead to deviations from the business environment. Kaczmarek, Kimino, and Pye (2012) indicate that long-tenured CEOs may establish sub-groups, and the conflicts that arise among these can entrench and destroy firm value. Longer tenure is usually associated with stronger power which may make the CEO less vulnerable (Hu & Kumar, 2004).…”

“…As discussed, managers with longer tenure are more entrenched, may establish sub-groups, and so are positively associated with poorer internal control quality (Hu & Kumar, 2004;Kaczmarek et al, 2012). Hence, we use the factor LONG_TENURE, indicating whether the length of CEO's tenure ranks in the top 20 percent in our sample, in our PCF analysis.…”

Governance, Boards of Directors and the Impact of Contracting on Not‐for‐profit Organizations – An Australian Study

“…">firm performance (Hermalin and Weisbach ; Hillman and Dalziel ; Kaczmarek et al . ; Shan and Xu ; Van‐Ness et al . ).…”