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You Pay a Fee for Strong Beliefs: Homogeneity as a Driver of Corporate Governance Failure

Katja Rost

University of Zurich - Institute for Organization and Administrative Science

Margit Osterloh

Professor of Management Science; Professor (em.) University of Zurich

November 20, 2008

The financial crisis made apparent the fact that managers and the boards of banks had failed to see the implications of irrational behavior and had ignored the risk associated with group think. Taking data from Switzerland our study shows that there is an increasing homogeneity of management and board teams. Most committees mainly consist of males with a managerial background. We derive from the existing literature the hypotheses that in radically changing environments women and individuals without a managerial background are less affected by systematic forecasting errors. Using a dataset collected shortly before the peak of the financial crisis we demonstrate that the groups which are highly underrepresented in most boards and management teams were significantly more capable of giving correct forecasts than the groups generally best represented in boards and management teams. To mitigate corporate governance failures we argue that firms should use simple social mechanisms in order to increase the diversity of their management and board teams while at the same time avoiding the danger of time consuming team conflicts. They should therefore include criss-cross individuals, i.e. individuals with no clear-cut group affiliation such as males with a non-managerial background as well as women with a management-related background.

Number of Pages in PDF File: 46

Keywords: Financial crisis, Board diversity, psychological economics, forecasting predictions, gender, expert knowledge, uncertainty

JEL Classification: D81, D84, G33, G38, C92, E47, J16, J15

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Date posted: November 23, 2008 ; Last revised: November 27, 2008

Suggested Citation

Rost, Katja and Osterloh, Margit, You Pay a Fee for Strong Beliefs: Homogeneity as a Driver of Corporate Governance Failure (November 20, 2008). Available at SSRN: http://ssrn.com/abstract=1304719 or http://dx.doi.org/10.2139/ssrn.1304719

Contact Information

Katja Rost (Contact Author)
University of Zurich - Institute for Organization and Administrative Science ( email )
Plattenstrasse 14
CH-8032 Zurich
Margit Osterloh
Professor of Management Science ( email )
Gibbet Hill Rd.
Coventry, West Midlands CV4 8UW
United Kingdom
Professor (em.) University of Zurich ( email )
Rämistrasse 71
Zürich, CH-8006
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