A Tale of Two Factions: Why and When Factional Demographic Faultlines Hurt Board Performance

Abstract

AbstractManuscript TypeEmpiricalResearch Question/IssueThe authors posit that to understand the effects of board demographic diversity on board performance, it is critical to recognize that board members often do not come to a board as independent entities but rather as delegates of specific interest groups so that the board has factions. The authors propose that demographic differences between these factions are likely to negatively affect board performance through social categorization processes.Research Findings/InsightA study of 318 Dutch pension fund boards shows that factional demographic faultlines negatively affect board performance, measured as perceived board effectiveness, and financial return on investment, through the perception of board members that the board is split into factional subgroups (i.e., faultline activation). At the same time, the disruptive effects from factional demographic faultlines are found to be reduced by board reflexivity.Theoretical/Academic ImplicationsBased on social categorization theory, this study shows that demographic faultlines between factions affect board performance to the extent that the faultlines are activated. If unnoticed by board members, demographic faultlines are unlikely to influence board behavior. The attenuating effect of board reflexivity underlines the importance of insight into the factors that drive social categorization within boards.Practitioner/Policy ImplicationsPractitioners should be aware that although factional demographic faultlines can be disruptive, there are ways to reduce these negative aspects. By overtly reflecting on board processes, board members can prevent factional demographic faultlines from resulting in social categorization within boards.