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

• Date: 01 July 2012
• DOI: http://doi.org/10.1111/j.1467-8683.2011.00895.x
• Author: Satomi Kimino,Szymon Kaczmarek,Annie Pye
• Published date: 01 July 2012

Board Task-related Faultlines and Firm

Performance: A Decade of Evidence

Szymon Kaczmarek, Satomi Kimino, and Annie Pye*

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 exacerbatethe 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 negativeconsequences of board schisms, such as accentuating superordinate boardidentity and/

or informal meetings.

Keywords: Corporate Governance, Boards of Directors, Faultlines, Performance

INTRODUCTION

The board of directors as a means of shareholders’ indi-

rect control has received considerable attention in aca-

demic research on corporate governance, which has been

maturing as an autonomous research f‌ield in the last 20

years (Durisin & Puzone, 2009). At the same time, the litera-

ture on the concept of faultline signifying team splits has

been growing since the publication of the pioneering work

by Lau and Murnighan (1998); however, it still remains little

utilized compared to the notion of diversity in research on

team effectiveness in general, and in corporate governance

and board research in particular (Mathieu, Maynard, Rapp,

& Gilson, 2008).

The notion of faultline allows us to bring predictions of

social identity theory (Ashforth & Mael, 1989; Hogg & Terry,

2000) into the analysis of board groups, which has the poten-

tial to provide insight into the social dynamics inf‌luencing

directors’ behavior. In this sense, the application of the

concept of faultline based on the predictions of social iden-

tity theory to corporate governance research contributes a

much needed contextual approach to understanding boards

of directors that goes beyond the dominant principal-agent

framework (Huse, Hoskisson, Zattoni, & Viganò, 2011).

For this reason, we apply the concept of faultlines from

the group effectiveness literature to the study of board

*Address for correspondence: University of Exeter Business School, Centre for Lead-

ership Studies, Streatham Court, Rennes Drive, Exeter EX44PU, UK. Tel. 44-1392-

722556; Fax: 44-1392-723210; E-mail: annie.pye@exeter.ac.uk

337

Corporate Governance: An International Review, 2012, 20(4): 337–351

© 2011 Blackwell Publishing Ltd

doi:10.1111/j.1467-8683.2011.00895.x