Pluralistic Ignorance in Corporate Boards and Firms' Strategic Persistence in Response to Low Firm Performance

Administrative Science Quarterly, Vol. 50, pp. 262-298, 2005

Ross School of Business Paper No. B004

38 Pages Posted: 11 Oct 2006  

James D. Westphal

University of Michigan - Stephen M. Ross School of Business

Michael Bednar

University of Texas at Austin - Red McCombs School of Business

Abstract

This study examines how a social psychological bias referred to as pluralistic ignorance may occur in corporate boards and how this bias could contribute to strategic persistence in response to relatively low firm performance. Our theory suggests that under conditions of low performance, there may be a systematic tendency for outside directors to underestimate the extent to which fellow directors share their concerns about the viability of the firm's corporate strategy. This reduces the propensity for individual directors to express their concerns about the current corporate strategy in board meetings, decreasing the likelihood that boards will initiate strategic change in response to low firm performance. We also posit factors that may moderate the extent to which pluralistic ignorance occurs on boards. We suggest that demographic homogeneity among outside directors (with respect to gender, functional background, education, and industry of employment) and the density of friendship ties among them will significantly moderate the occurrence of pluralistic ignorance on boards. We test our hypotheses with original survey data from a large sample of outside directors at medium-sized U.S. companies and find support for our theory. We discuss contributions of our theory and findings to the literatures on corporate governance, strategic persistence and change, and group decision-making processes in organizations.

Keywords: boards, strategic change, strategic decision making

JEL Classification: G34

Suggested Citation

Westphal, James D. and Bednar, Michael, Pluralistic Ignorance in Corporate Boards and Firms' Strategic Persistence in Response to Low Firm Performance. Administrative Science Quarterly, Vol. 50, pp. 262-298, 2005; Ross School of Business Paper No. B004. Available at SSRN: https://ssrn.com/abstract=936718

James D. Westphal (Contact Author)

University of Michigan - Stephen M. Ross School of Business ( email )

701 Tappan Street
Ann Arbor, MI MI 48109
United States

Michael Bednar

University of Texas at Austin - Red McCombs School of Business ( email )

Austin, TX 78712
United States

Paper statistics

Downloads
281
Rank
85,612
Abstract Views
1,432