Corporate Governance and Knowledge Management: How Board Independence May Increase CEO Paranoia, and Lead to Increased Top Management Team Homophily

Abstract:     
What are the implications of changes in corporate governance for a firm’s ability to create and transfer knowledge? This study suggests that board changes ostensibly aimed at bolstering the monitoring role of governance may inadvertently, as a result of CEO social cognitions, undermine a firm’s knowledge management capabilities through increases in top management team (TMT) homophily. Our theory builds on the premise that the TMT is the information processing center of the firm in its relationship with the environment. We theorize how changes in board composition that increase the board’s social independence from CEOs may affect TMT member selection through symptoms of CEO non-clinical paranoia about their relations with the board. Our theory is tested with data from an original survey of CEOs and outside directors from 263 large- and medium-sized U.S. global corporations, together with archival data on board composition and management characteristics. We submit that CEOs manifesting non-clinical paranoia are more likely to appoint executives like themselves to the top team; and these new executives also have fewer ties to the board. Results suggest that social psychological cognitions among corporate leaders may lead to TMT homophily - that is, less diversity in top management teams, including diversity of social network ties. Such homophily has, in turn, been shown to stifle new knowledge creation, knowledge transfer, and ultimately, strategic change.

Keywords: Boards of directors, CEOs, TMT homophily

Accepted Paper Series