Board task-related faultlines and firm performance: a decade of evidence

Abstract

ABSTRACT Manuscript Type: Empirical Research Question/ Issue: To what extent can group faultlines and their potential value-destroying 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 non-executive 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 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 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 unitary boards, where NEDs and EDs share board responsibility, exhibit pre-existing 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 a careful selection process of directors by 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 schisms, such as accentuating superordinate board identity and/ or informal meetings.