Academic journal article Academy of Strategic Management Journal

Board Heterogeneity: Double-Edged Sword? Focusing on the Moderating Effects of Risk on Heterogeneity-Performance Linkage

Academic journal article Academy of Strategic Management Journal

Board Heterogeneity: Double-Edged Sword? Focusing on the Moderating Effects of Risk on Heterogeneity-Performance Linkage

Article excerpt

INTRODUCTION

Corporate leaders in today's volatile business arena are increasingly interested in the influence of board composition on strategic performance of firms. Thereby, greater research attention has been directed to compositional attributes that may increase a board's strategy role and, in particular, to the effects of board heterogeneity (e.g., Hillman & Dalziel, 2003; Haynes & Hillman, 2010; Tuggle, Schnatterly & Johnson, 2010). Since the board is a strategic decision-making group at the apex of the corporation, the implications of board heterogeneity for firm performance present important research questions. Board heterogeneity originally was seen as a desirable goal by many corporations, either to better reflect diversity found in the workforce and consumer groups or simply to be viewed as a socially responsible company (Robinson & Dechant, 1997).

The extant theoretical models on group composition-performance link, however, have provided competing prescriptions regarding the impact of group heterogeneity on performance. One school argues that increasing the cognitive heterogeneity in a group will increase the variety in human capital (Finkelstein & Hambrick, 1996; Mannix & Neale, 2005; Cannella, Park & Lee, 2008). Variations among group members' cognitive backgrounds provide diversity in information, experiences, and perspectives, which in turn will increase the group's decision comprehensiveness.

The opposing perspective holds that increasing heterogeneity leads to behavioral disintegration among group members, resulting in decreased social capital and process efficiency in a group (Pelled, Eisenhardt & Xin, 1999; Jackson & Joshi, 2001; Li & Hambrick, 2005). Demographically dissimilar group members are more likely to be socio-culturally distant, resulting in inefficiencies in interpersonal communications and internal dynamics. Thus, it should be noted that the extant literature on group composition provides ambiguous guidance to those seeking to answer the question: "How does board of directors' heterogeneity that embodies both positive and negative facets impact corporate performance?" Surprisingly, this important issue has been rarely explored in the research areas of board of directors and organization studies.

One path to resolving these competing perspectives on board heterogeneity is to examine the implications of board heterogeneity in particular contexts. This approach enables corporate practitioners to be aware of the role of contingency contexts involved when they make choices on the continuum between board heterogeneity and homogeneity, and academic researchers to develop mid-range theories that can help reduce the ambiguity associated with board heterogeneity. To this end, this study empirically investigates how board heterogeneity impacts firm performance in the managerial context of firm risk.

Firm risk, defined as volatility in business outcome variables, has been a central research topic across disciplines such as strategic management and financial economics (Ruefli, Collins & Lacugna, 1999; Gomez-Mejia, Haynes, Nunez-Nickel, Jacobson & Moyano-Fuentes, 2007). The context of higher firm risk provides top management including the board of directors with a greater demand for process efficiency in adapting to volatile firm-environment relationship. Managerial choices in environmental adaptations, for example, include R&D investments, changes in diversification posture, acquisitions and divestitures, adaptations in competitive strategy, and structural changes in resource allocation (Palmer & Wiseman, 1999). Such strategic decisions and their subsequent implementation are highly consequential board-level matters that have substantial impact on firm performance. In this respect, the managerial context of firm risk is an ideal research setting for studying possible divergent influences of board heterogeneity on firm performance. …

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