Hidden Order: A Literature Review of Board Informal Hierarchy and Prospects

Abstract

Board informal hierarchy, as an informal structure in the boardroom, reflects the status of directors in board based on their competence and influence, and this informal structure affects the interaction of boardroom members. Unlike the formal structure in board, informal hierarchy doesn’t have formal contracts which guarantee directors’ authority. Informal hierarchy usually develops from social norms and group consensus. Relative studies are based on the decision-making process in boardroom, focusing on the hidden order among group members and exploring its influence on group performance, which plays an important role in uncovering the path between the board structure and the governance effect. Studies in this field provide a new way to open the black box of the board. However, the boundary and mechanism of board informal hierarchy still need to be clarified. Relative studies still lack a systematic and unified theory to demonstrate the shaping process of informal hierarchy and its governance effects. This research reviews relative studies systematically to clarify the definition of board informal hierarchy from the contribution factors, hierarchy order and structure, which helps to explicit the main subject and clear boundary of board informal hierarchy research. Then the shaping process of board informal hierarchy is analyzed to show that the informal hierarchy structure is the result of combined effects of social norms and group consensus. In the process of constructing the theoretical framework, this study summarizes the background, mechanism and governance effects of board informal hierarchy. As the board is built with the flat organization structure, the limit of directors’ energy, group conflicts and complexity of decision-making result in a decline of board effectiveness, which in return provides space for the coordinating role of board informal hierarchy. The mechanism is reviewed from the power distance perspective and the relational contract perspective with current literature, which reveals the difference of theories on the individual level and the consensus on the group level of informal hierarchy’s influence. And in this way the theoretical explanation of dual governance effects of informal hierarchy is developed. In order to make a comprehensive understanding of its influence on board members and corporate performance, context variables of board informal hierarchy are sorted into external variables and internal variables. The main characteristics of these context variables are discussed and their impacts on the hidden order of board informal hierarchy are analyzed. In the end, the inadequacies of previous studies are pointed out and the prospects of future research in this field are made. Based on board informal hierarchy, this study intends to elaborate the deep impacts on the board decision-making process caused by the hidden order among directors. An integrative view of the progress and frontier theories of board informal hierarchy is developed, which also accelerates the transition of board studies from the traditional static view of the board structure to the dynamic view of board involvement. With the method of literature review and theoretical comparison, we establish an integrated framework of board informal hierarchy. This not only enriches the board research, but also provides inspiration for improving corporate governance in companies.