Director Overlap: Groupthink versus Teamwork

Abstract

Corporate boards are comprised of individual directors but make decisions as a group. The quality of their decisions affects firm value. In this study, we focus on one aspect of board structure–– director overlap––the overlap in service for a given pair of directors in a given firm, averaged across all director pairs in the firm. Greater overlap among directors can lead to negative synergies through groupthink, a mode of thinking by highly cohesive groups where the desire for consensus potentially overrides critical evaluation of all possible alternatives. Alternatively, greater overlap can lead to positive synergies through a reduction in coordination and communication costs, resulting in more effective teamwork. We hypothesize that: (i) director overlap will have a more negative effect on firm value for dynamic firms, which value critical thinking and hence stand to lose more from groupthink; and (ii) director overlap will have a more positive effect on firm value in complex firms, which have higher coordination costs and hence benefit from better teamwork. We find results consistent with our predictions. Our results have implications for the term limits of directors because term limits impose a ceiling on director overlap.