The Path to Independence: Board Cohesion, Cognitive Conflict, and Information Sharing

Abstract

ABSTRACT Corporate boards in America are dominated currently by outside directors because of the belief that they are more effective at monitoring management. There continues to be debate, however, concerning whether regulators should dictate board composition using input-based attributes of directors such as outside status. Opponents contend that board independence is best established through applying voluntary best practices to board processes. In this research, we study board processes and examine how the group task cohesion that is determined by directors' social similarity affects outside directors' reports that the CEO influences their beliefs, a key element of director independence. We propose that the degree of social similarity (similarity as to backgrounds) between outside directors and other directors is positively related to the degree of commitment directors have toward the board's tasks. We show that this task commitment (cohesion) has a positive effect on directors' efforts to obtain and receive information from the firm and CEO. Additional analyses show that the effect of information sharing on the level of CEO influence of outside directors depends on the presence of cognitive conflict—constructive discussion among directors regarding differing viewpoints—between the outside directors and the inside directors. We test our hypotheses using a survey, which was developed based on in-depth field interviews, and the archival data on directors' attributes as well as firm-level outcomes. Results support the hypotheses, and have implications for regulators and boards.