Director Overlap: Groupthink versus Teamwork

Abstract

We address two aspects of board dynamics — group-think and teamwork — that both arise from increased director overlap. Overlap captures the extent of common service by board directors. Greater overlap can lead to excessive cohesiveness of the group and thus group-think, where the desire for consensus overrides critical thinking. Alternatively, greater overlap can promote better teamwork through lower coordination and communication costs. We find that director overlap negatively affects firm value in dynamic firms, which stand to lose more from group-think, and positively affects firm value in complex firms, which have higher coordination costs and hence benefit from better teamwork.

Keywords: Corporate Governance; Boards; Director Overlap; Group-think; Teamwork; Dynamic Firms; Complex Firms; Director Tenure, Term Limits

JEL Classification: G32; G34; K22