Faults and Faultlines: The Effects of Board Faultlines on CEO Dismissal

Abstract

On the basis of the view that the board’s evaluation of the CEO is determined by the board decision-making as a group, we adopt the faultline approach to analyze group dynamics in the board. Faultlines can split a board based on the alignment of multiple attributes of individual directors and potentially create subgroups within the board. In this study, we argue that different types of faultlines have distinct effects on board decision-making. Specifically, we predict that demographic faultlines can increase conflicts among directors, hampering the board’s ability to decide on CEO dismissal when firm performance is below the aspiration level. On the other hand, information-based faultlines can facilitate exchange of diverse knowledge and elaboration of alternative perspectives, which can improve the board’s ability to dismiss a CEO when firm performance is below the aspiration level. Our analysis of S&P 500 boards supports our prediction that board faultlines based on demographic attributes of directors significantly reduce the board’s ability to fire the CEO when firm performance is below the aspiration level, whereas faultlines based on information-related attributes magnify the board’s ability to dismiss a poor-performing CEO. By demonstrating different effects of faultlines based on heterogenous types of director attributes, this study contributes to the board faultline literature. We also contribute to CEO dismissal research by showing how group dynamics of boards moderates the relationship between firm performance and CEO dismissal.