The lines that divide: Board demographic faultlines and proactive environmental strategy

• Published date: 01 September 2024
• Author: Claudia Arena,Nicolas Garcia‐Torea,Giovanna Michelon
• Date: 01 September 2024
• DOI: http://doi.org/10.1111/corg.12570

ORIGINAL ARTICLE

The lines that divide: Board demographic faultlines and

proactive environmental strategy

Claudia Arena

1

| Nicolas Garcia-Torea

2

| Giovanna Michelon

3

1

Department of Economics, Management and

Institutions, University of Naples Federico II,

Naples, Italy

2

Departamento de Economía y Administraci

on

de Empresas, Universidad de Burgos, Burgos,

Spain

3

University of Bristol Business School,

University of Bristol, Bristol, UK

Correspondence

Nicolas Garcia-Torea, Departamento de

Economía y Administraci

on de Empresas,

Universidad de Burgos, Burgos, Spain.

Email: ngtorea@ubu.es

Funding information

Spanish Ministry of Science and Innovation,

Grant/Award Number: TED2021-129520B-

I00; Agencia Nacional de Investigaci

on,

Grant/Award Number: PID2021-122389OB-

I00; Junta de Castilla y Le

on, Grant/Award

Number: BU069P20

Abstract

Manuscript Type: The manuscript is of an empirical nature.

Research Question/Issue: The current ecological crisis requires boards of directors

to tackle environmental concerns and manage dependencies with the external envi-

ronment in highly dynamic conditions. Proactive environmental strategies (PESs) seek

to establish alternative and innovative processes and products that create new mar-

ket opportunities. By mobilizing the notion of board demographic faultlines, we

investigate their link with PESs and the influence of the internal board dynamics and

environmental factors on this relationship.

Research Findings/Insights: The multilevel regression analysis of a 7-year sample of

UK boards reveals that demographic faultlines hinder their information processing in

adopting PESs. The results also show that the negative relationship between demo-

graphic faultlines and PESs is attenuated by the social similarity of the CEO and chair

in the same subgroup and by the financial materiality of the natural environment.

Theoretical/Academic Implications: This study draws on faultline theory to analyze

how the structure of board diversity through the alignment of multiple directors'

demographic attributes affects board dynamics by creating polarized boards that

shape sustainability decisions. This study underscores the disruptive effect of having

socially distanced subgroups within the board and the salience of board leaders'

social similarity and environmental factors in attenuating their dysfunctional effects.

Practitioner/Policy Implications: Board diversity is considered key to improving

board decision-making. By situating our empirical investigation in a country with a

corporate governance model that fosters diversity in a dual leadership board struc-

ture that has influenced other countries' governance models, this study provides

insights for policymakers and market participants on the unintended effects of the

global call for board diversity on firms' proactive environmental stance. Our results

call for establishing procedures to incentivize board socialization and facilitate direc-

tors' information processing.

KEYWORDS

corporate governance, board of directors, environmental factors, environmental strategies,

faultlines

Received: 1 February 2022 Revised: 4 October 2023 Accepted: 8 December 2023

DOI: 10.1111/corg.12570

This is an open access article under the terms of the Creative Commons Attribution-NonCommercial-NoDerivs License, which permits use and distribution in any

medium, provided the original work is properly cited, the use is non-commercial and no modifications or adaptations are made.

© 2024 The Authors. Corporate Governance: An International Review published by John Wiley & Sons Ltd.

Corp Govern Int Rev. 2024;32:833–855. wileyonlinelibrary.com/journal/corg 833

1|INTRODUCTION

The current ecological crisis requires efforts by all parties in society to

address the key issues that can make the planet a “safe operating

space for humanity”(Rockström et al., 2009). Firms are crucial players

in this context because of the increasing recognition of their depen-

dencies on the natural environment and their negative (more often

than positive) impacts on the planet's ecological stability (Unerman

et al., 2018). Despite the growing relevance of sustainability on the

board's agenda (Jamali et al., 2008; Rao & Tilt, 2016), the lack of a

comprehensive understanding of the corporate governance of envi-

ronmental sustainability remains. This is often defined as “those

behaviors and strategies that reflect a firm's distribution of rights and

responsibilities around environmental sustainability issues”(Aguilera

et al., 2021, p. 1469). This includes, among others, the role of board

diversity in ensuring a healthy debate on environmental strategies.

Research has only begun to examine how the alignment of diver-

sity attributes within organizational teams influences green technolo-

gies (Ma et al., 2021), neglecting the internal dynamics depending on

both corporate, such as leadership, and environmental factors

(Wangrow et al., 2015). Notably, little is known about the influence of

boards' configurational structure on the implementation of proactive

environmental strategies (PESs) (Ortiz-de-Mandojana et al., 2012;

Sharma & Vredenburg, 1998) under different leadership structures

and contextual conditions (Wangrow et al., 2015). PESs aim to create

new market opportunities by developing alternative, innovative envi-

ronmental technologies and processes or sustainable products and are

fundamental for the transition to sustainability (Arag

on-Correa &

Sharma, 2003; Sharma, 2000). Hence, it is important and timely to

understand how different board configurations influence their

implementation.

We apply the notion of faultlines (Lau & Murnighan, 1998)to

conceptualize the social dynamics behind board's subgrouping based

on the alignment of two demographic attributes (gender and age)

(Leicht-Deobald et al., 2021) that are the most relevant in driving

environmental outcomes (Kumar & Paraskevas, 2018) and to disen-

tangle which board configuration is more or less beneficial for firms to

engage in PESs. Faultlines refer to the “hypothetical dividing lines that

may split a group into subgroups based on one or more attributes”

(Lau & Murnighan, 1998, p. 328). Decisions on PESs are typically stra-

tegic and require board discussions. They imply an anticipatory

approach to seize opportunities to create new environmentally

friendly businesses (Marcus & Fremeth, 2009) and improve environ-

mental effectiveness and efficiency (Berry & Rondinelli, 1998) through

research and development (Sharma & Vredenburg, 1998). They are

technically and socially complex because they entail a redesign and

reconfiguration of firms' resources and innovation processes (Russo &

Fouts, 1997), which require the involvement of multiple actors at dif-

ferent corporate levels, including the board (Arag

on-Correa, 1998).

Thus, implementing PESs should be agreed upon within the board

because it is a long-term decision requiring a shared organizational

vision (Arag

on-Correa & Sharma, 2003). Demographic faultlines have

clear team-splitting power (Wu et al., 2021) because they are based

on directly visible or class-based markers, such as gender (Richard

et al., 2019), leading to negative social interaction among board sub-

groups due to categorization, stereotyping, and prejudice (Crucke &

Knockaert, 2016). Moreover, these attributes account for directors'

different values and views on sustainability (Byron & Post, 2016;

Endrikat et al., 2021; Ludwig & Sassen, 2022). Therefore, demographic

faultlines might polarize boards, creating highly distanced “psychologi-

cal groups”(Leicht-Deobald et al., 2021) that reduce the likelihood of

directors agreeing to implement PES. Further, we posit that the extent

to which strong demographic faultlines unfold depends on some

salient features of internal and external context (i.e., corporate

leaders' position relative to faultlines and the financial materiality of

the natural environment).

We test our hypotheses using a sample of UK firms from 2011 to

2017. The United Kingdom represents an interesting case as its

Corporate Governance Code guarantees similar corporate governance

arrangements during the period analyzed across firms, while encour-

aging board diversity and nudging boards to incorporate environmen-

tal issues into corporate strategies (see Companies Act, 2006;

Financial Reporting Council, 2018). Additionally, the United Kingdom

provides a suitable context to analyze the influence of leaders' posi-

tion relative to faultlines as it is characterized by a “dual leadership”

structure where the board chair and CEO positions are usually held by

different individuals (Financial Reporting Council, 2018).

We employ a multilevel analysis that accounts for the nested/

crossed structure of the data and find that the board is less prone to

engage in PESs when the alignment of director's age and gender gen-

erates demographic faultlines. This result supports the idea that the

potential conflicting subgroups driven by faultlines obstruct the board

decision-making process on PESs. Additionally, we document that

some salient features of firms' leadership and environmental condi-

tions shape the role of faultlines in PESs. We find that the negative

relationship between demographic faultlines and PESs is attenuated

when faultlines create a configuration with one powerful and

resourceful subgroup characterized by a high social similarity of the

CEO and Chair. We also report that polarized board are more likely to

overcome the disruptive effect of faultlines on PES in contexts where

ecological aspects are more likely to affect firm's financial perfor-

mance (i.e., the natural environment is financially material).

This investigation contributes to the literature in three ways. First,

informed by demographic faultlines (Lau & Murnighan, 1998) to study

board dynamics (Huse, 2007), our investigation highlights the impor-

tance of social interactions within and across board subgroups in

shaping the likelihood of firms adopting PES. Specifically, we respond

to calls for models that analyze the combined effect of board attri-

butes to better understand the link between board demographic

attributes and sustainability-related outcomes (Aguilera et al., 2021;

Endrikat et al., 2021; Ludwig & Sassen, 2022; Rao & Tilt, 2016). We

combine directors' gender and age because they are the most

relevant attributes in setting the board's green agenda (Kumar &

Paraskevas, 2018) and represent the most significant demographic

catalysts of directors' subgrouping (Crucke & Knockaert, 2016;

Vandebeek et al., 2021). Therefore, we go beyond studies exploring

834 ARENA ET AL.