Beyond diversity: Towards a behavioral understanding of the board of directors

Various regulatory governance initiatives have encouraged board diversity, as a diverse board stimulates creativity, encourages discussion, and enlarges the board’s knowledge base. However, how diversity contributes to group performance is incompletely understood. Increased diversity results in superior decision-making only when the board is free from conflicts and acts as a cohesive group. This PhD extends existing corporate governance research by introducing faultline theory to the board of directors (Lau and Murnighan 1998). The idea is to show how a board’s diversity structure can give rise to the formation of subgroups along faultlines. The resulting subgroup formation may in turn reduce board effectiveness. This research project shows diversity and the associated potential for subgroup formation to be key drivers of board and audit committee effectiveness. Understanding potential unintended consequences of board diversity should be of interest to regulators and to companies that plan to appoint new directors to the board.