娀 Academy of Management Journal

2011, Vol. 54, No. 6, 1119–1139.

http://dx.doi.org/10.5465.amj.2009.0824

BOARD INFORMAL HIERARCHY AND FIRM FINANCIAL

PERFORMANCE: EXPLORING A TACIT STRUCTURE GUIDING
BOARDROOM INTERACTIONS
JINYU HE
ZHI HUANG
Hong Kong University of Science and Technology

We consider boards as human groups in the uppermost echelon of corporations and

examine how an informal hierarchy that tacitly forms among a firm’s directors affects
firm financial performance. This informal hierarchy is based on directors’ deference
for one another. We argue that the clarity of the informal hierarchy can help coordi-
nate boardroom interactions and thereby improve the likelihood of the board’s con-
tributing productively to the firm’s performance. We further identify a set of internal
and external contingencies affecting the functioning of the informal hierarchy. Our
analysis of seven-year panel data on 530 U.S. manufacturing firms provides support
for our arguments.

When the boards make good decisions, companies
prosper, and when companies prosper, the nation
prospers. Who the directors are, what boards of di-
rectors do and how well they do it are important
issues, not only for all shareholders, but for every-
one dependent upon a vigorous economy for their
well-being, which is to say, everyone. (Leblanc &
Gillies, 2005: 50 –51)
Directors who truly want to build an effective board
need to look far beyond any externally imposed
rules and procedures. The starting point is taking an
honest look at how—and how well—they work with
one another. (Carter & Lorsch, 2004: 164)
Although it has been extensively researched,
how corporate boards1 influence their firms’ finan-
The two authors contributed equally to this article and
are listed in alphabetical order. We thank Ruth Aguilera,
Prithviraj Chattopadhyay, Karen Lee, Haiyang Li, Ravi
Madhavan, Chris Marquis, Kirill Novoselvo, Wouter
Stam, David Tan, Danqing Wang, Heli Wang, Qian Wang,
Ellick Wong, Hongwei Xu, Hongquan Zhu, and partici-
pants in the Hong Kong Polytechnic University’s re-
search seminar for their valuable comments on earlier
versions of this article. We also appreciate with thanks
the constructive suggestions and guidance that we re-
ceived from Associate Editor Gerry Sanders and three
anonymous reviewers.
Editor’s note: The manuscript for this article was ac-
cepted for publication during the term of AMJ’s previous
editor-in-chief, Duane Ireland.
1
Under the Anglo-Saxon corporate governance system
and in this research, a board refers to a corporation’s
single (one-tier) board, usually composed of “inside di-
rectors,” who are top managers in the company, and
“outside directors,” who are not company employees.
1119
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cial performance remains a puzzle. Boards, occu-
pying “the very uppermost echelon of corpora-
tions” (Johnson, 2004: 39), are thought to play the
critical roles of monitoring and advising manage-
ment as well as helping firms to manage resource
dependence (Hillman & Dalziel, 2003; Johnson,
Daily, & Ellstrand, 1996). It is thus widely believed
that a firm’s board can and should influence the
firm’s financial performance. Regardless of the dif-
ferences in their theoretical perspectives, research-
ers examining the performance effects of corporate
boards have predominantly focused on boards’ for-
mal, structural attributes. But decades of research
have found no evidence of systematic performance
effects of board attributes such as leadership struc-
ture and inside/outside director ratio (Dalton,
Daily, Ellstrand, & Johnson, 1998; Dalton, Hitt,
Certo, & Dalton, 2007; Johnson et al., 1996; Zahra &
Pearce, 1989).
The lack of systematic, empirical evidence link-
ing the formal structural attributes of boards with
firm performance has led many scholars to suggest
that to truly understand how boards affect firm
performance, researchers need to pay more atten-
tion to actual interactions in boardrooms (Carter &
Lorsch, 2004; Finkelstein & Mooney, 2003; Johnson
et al., 1996; McNulty & Pettigrew, 1999; Pettigrew,
1992; Zahra & Pearce, 1989). Furthermore, many
have started to realize that informal aspects of cor-
porate boards such as personal relationships and
emotional conflicts can play a critical role in defin-
ing how board members interact with each other
when deciding on corporate issues (Johnson, 2004;
Westphal, 1999; Westphal & Stern, 2006). This
is not surprising if one recognizes the simple yet
1120 Academy of Management Journal
often overlooked fact that boards are first and fore-
most groups of human individuals. Finkelstein and
Mooney pointed out that “the insight that boards
are groups, and hence that such group processes as
conflict, teamwork, and comprehensiveness are
critical determinants of board effectiveness, opens
up a new track on how to improve board effective-
ness” (2003: 103). Despite formal definition of the
roles of group members, generic, often tacit forces
have been shown to affect group decision making
(e.g., Baron & Kerr, 2003; Moscovici & Doise, 1994).
This evidence suggests the promise of studying the
performance effects of a board’s informal structures
from a social group perspective.
Although scholars have recognized the value of
studying corporate boards from a group perspective
and the existence of informal social structures
among group members, the exploration of such in-
sights has remained largely conceptual or descrip-
tive (e.g., Finkelstein & Mooney, 2003; Forbes &
Milliken, 1999; Johnson, 2004). To fully realize the
promise of such insights, in this study we examine
a central question: How does the informal hierar-
chy among the directors on a firm’s board influence
the firm’s financial performance? Like the mem-
bers of other human groups, directors on a board
are likely to implicitly and automatically sort into
an informal hierarchy based on the deference that
they have for each other’s individual competence
and influence (Bales, 1970; Gould, 2002; Overbeck,
Correll, & Park, 2005; Ridgeway & Johnson, 1990;
Whyte, 1943; also see Magee & Galinsky [2008] for
a review). Once formed, the informal hierarchy is
likely to influence board interactions by function-
ing as a coordinating mechanism. Because directors
usually spend relatively little time together, and
because directors’ tasks are often too ambiguous to
be effectively guided through formal rules (Carter &
Lorsch, 2004; Finkelstein & Mooney, 2003; John-
son, 2004; Leblanc & Gillies, 2005), this informal
hierarchy might be particularly influential in coor-
dinating individual directors’ contributions to a
firm (cf. Magee & Galinsky, 2008).
The informal hierarchies on corporate boards are
likely to vary in their clarity (cf. Blau, 1977). When
directors of a board receive similar levels of defer-
ence, the informal hierarchy is ambiguous; when
the directors differ considerably in the deference
they receive, the informal hierarchy is clearer. All
else being equal, a clear informal hierarchy may
provide interacting directors with clear lines of di-
rection and implicit role expectations, helping
them discuss and decide on corporate issues more
productively. By contrast, lack of such clarity tends
to create confusion, frustration, and possibly even
destructive conflict, compromising the effective-
December
ness and efficiency of the board’s interactions.
Since directors are believed to have the capacity to
influence firm performance (Carter & Lorsch, 2004;
Finkelstein & Mooney, 2003), factors affecting
board productivity are likely to have an impact on
firm performance. It then follows that a clear infor-
mal hierarchy among directors is thus likely to
contribute positively to firm performance, all else
being equal. We further suggest that such a positive
effect is likely to be contingent on factors both
internal and external to a board. Internally, it mat-
ters to the functioning of board informal hierarchy
who occupies the top position in the informal hi-
erarchy, whether the directors are particularly sen-
sitive to this social structure, and how easily they
can cognitively retrieve and act by the deference
order. Externally, crisis situations and more chal-
lenging business environments place greater de-
mands on the informal hierarchy to guide board-
room interactions. This study addressed five such
factors: (1) the rank of a firm’s CEO in the informal
hierarchy of the firm’s board, (2) (the board’s rank
composition (members’ average rank in the corpo-
rate community), (3) board size, (4) the firm’s past
performance, and (5) environmental dynamism.
To test these theoretical propositions, we used the
inequality of directors’ board memberships—that is,
overall differences in the numbers of corporate
boards on which individual directors serve simulta-
neously—as a proxy for the clarity of a board’s infor-
mal hierarchy, because board memberships often sig-
nal the respect and recognition that each director
receives from the general corporate community
(D’Aveni, 1990; Davis, Yoo, & Baker, 2003; Mace,
1986; Mizruchi, 1996). Our analysis of panel data on
a sample of U.S. manufacturing firms from 2001 to
2007 provides strong support for the predictions.
This study has implications for both board research
and corporate governance practices. Most previous
studies have focused on formal board structures
when assessing board effects on firm performance,
but this study has departed from that approach by
focusing on an informal hierarchy based on directors’
deference for each other. It empirically tested how the
tacitly formed social structures commonly observed
in other human groups may guide directors’ interac-
tions and thus their contributions to firm perfor-
mance. Practically, the results suggest that boards
aiming to improve their productivity should pay at-
tention to the informal aspects of their composition,
such as the directors’ social status and affiliations.
THEORY AND HYPOTHESES
Boards are groups—specifically, the groups re-
sponsible for deciding on strategic issues for firms.
2011
Directors bring to a firm important information
about such matters as corporate structures (Palmer,
Jennings, & Zhou, 1993) and acquisitions (Haun-
schild, 1993). They participate in formulating, eval-
uating, reorienting, and approving firm strategies
(e.g., Daily, Dalton, & Cannella, 2003; Johnson,
2004; Judge & Zeithaml, 1992; Lorsch & MacIver,
1989). And they choose the CEO for the firm and
approve executive compensation (e.g., Goodstein,
Gautam, & Boeker, 1994). Such activities as well as
many others that directors perform are believed to
have significant implications for a firm’s financial
performance. And, many researchers have sug-
gested that a board’s effectiveness in performing its
strategic roles depends strongly on the extent to
which it is able to function effectively as a group
(e.g., Carter & Lorsch, 2004; Finkelstein & Mooney,
2003; Forbes & Milliken, 1999; Huse, 2007; John-
son, 2004; Leblanc & Gillies, 2005). Thus, to under-
stand the influence that boards exert, scholars have
started focusing on unpacking what actually hap-
pen inside the boardroom when directors interact,
primarily through field studies and surveys.
Such studies have highlighted two critical issues
that render effective group functioning particularly
important if directors are to contribute to firm per-
formance to their full potential. First, the number of
board meetings in a year is usually low, and each
meeting is short (Carter & Lorsch, 2004; Finkelstein
& Mooney, 2003; Leblanc & Gillies, 2005), yet di-
rectors need to make complicated decisions during
the limited time available. Without effective ways
of guiding interactions in the boardroom, they will
be less likely to make concrete contributions to firm
performance. Second, a director’s job description is
both general and ambiguous, and thus it is often
difficult to establish any formal rules or procedures
to effectively guide directors’ work (Finkelstein &
Mooney, 2003; Johnson, 2004; Leblanc & Gillies,
2005; Lorsch & MacIver, 1989). Recognizing these
issues, Forbes and Milliken commented that:
[Boards] of directors can be characterized as large,
elite, and episodic decision-making groups that face
complex tasks pertaining to strategic-issue process-
ing ... they are particularly vulnerable to “process
losses” (Steiner, 1972)—the interaction difficulties
that prevent groups from achieving their full poten-
tial ... the effectiveness of boards is likely to depend
heavily on social-psychological processes, particu-
larly those pertaining to group participation and
interaction, the exchange of information, and criti-
cal discussion. (1999: 492)⬎
Given the difficulty in relying on formal rules
and procedures to guide boardroom interactions
(Finkelstein & Mooney, 2003; Johnson, 2004; Le-
blanc & Gillies, 2005), we set out to examine how
He and Huang 1121
the informal hierarchical order among the directors
on a board affects firm performance by shaping the
board’s group processes. Much as in any other hu-
man group, an informal hierarchical order is likely
to form in a board of directors (e.g., Gould, 2002;
Homans, 1961; Magee & Galinsky, 2008; Overbeck,
et al., 2005; Whyte, 1943). We propose that this
informal hierarchy is likely to be based on differ-
entiation in the deference that directors give and
receive. If so, the clarity of the informal hierarchy
will increase with the degree of such differentiation
(Blau, 1977). Greater clarity of the informal hierar-
chy will help directors interact more productively,
and the result would tend, other things being equal,
to be reflected in better decision making and con-
sequently better financial performance for the firm.
Moreover, both internal and external factors are
likely to influence such coordination benefits of a
board’s informal hierarchy.
Board Informal Hierarchy and Firm Financial
Performance
In group settings, individuals spontaneously
form inferences about each other’s competence and
influence, and such inferences often result in an
informal hierarchical order that guides their inter-
actions (see Magee and Galinsky [2008] for a recent
review). This process has been observed in a wide
variety of human groups, including, for example,
street corner gangs (Whyte, 1943), fraternities
(Gould, 2002), and work groups (Groysberg, Polzer,
& Elfenbein, 2009). Previous studies have shown
that such an informal hierarchy is also likely to
emerge in a corporate board as directors receive
different amounts of respect and attention from
other board members with regard to their opinions
on firm strategic issues (e.g., Belliveau, O’Reilly, &
Wade, 1996; D’Aveni, 1990).
The directors on a board are likely to generally
understand a deference-based hierarchical order,
just as the members of other human groups do
(Magee & Galinsky, 2008; Overbeck et al., 2005).
Reflecting on this, Paul Fulchino, a former CEO of
Aviall Inc., commented, “If you threw five dogs in
a room, they would be very clear about who the
senior dog was and who the junior dogs were”
(Finkelstein & Mooney, 2003: 105). Such shared
understanding allows the informal hierarchy to
structure interactions among directors when they
discuss corporate issues. Consider first the situa-
tion in which the directors on a board can be
clearly ranked—that is, where the clarity of the
informal hierarchy is high. Such a hierarchy pro-
vides a clear social order within which the opin-
ions of higher-ranking directors are likely to be
1122 Academy of Management Journal
more respected. Lower-ranking directors may re-
spectfully allow higher-ranking directors to lead
while focusing themselves on task-oriented issues
and contributing constructive ideas in cooperative
ways. As a result, unproductive conflicts among
the directors can be minimized, enhancing the ef-
fectiveness and efficiency of board interactions.
Meanwhile, the higher-ranking directors can lever-
age their position to facilitate board interactions by
acting as arbitrators when other directors disagree
or as endorsers of good ideas proposed by lower-
ranking directors. Rich evidence supports the exis-
tence of this pattern in other contexts. Whyte
(1943) observed that groups of young boys showed
less interpersonal aggression when rank differences
existed. Gould (2003) proposed and demonstrated
that social conflicts rarely occur between actors of
clearly different ranks. More relevantly to the con-
text of boards, Leblanc and Gillies discussed the
instrumentality of a rank order for board interac-
tions, with particular emphasis on the role of re-
spected leaders:
A board cannot work, that is, reach good decisions,
unless there are directors who, through credibil-
ity . . . are on occasion able to persuade other direc-
tors and management of their point of view or of a
particular course of action. At the same time, a
board cannot work unless there are directors who
can find common themes within dissenting views
and bring about a consensus. (2005: 143)
By contrast, when no clear hierarchical order
exists among group members (when the clarity of
the informal hierarchy is low), group interactions
tend to “become confusing, inefficient, and frus-
trating, and, thus, coordination suffers” (Magee &
Galinsky, 2008: 357). To the extent that informal
hierarchy provides a deference order among the
directors on a board, the lack of such a hierarchy
may lead them to get caught in a contest for rank
and ultimately respect (Gould, 2003; Overbeck et
al., 2005). Worse yet, with similarity in rank, no
director is positioned to reconcile contestants, so
the situation may easily escalate. Competition for
rank may deteriorate into destructive conflict, pre-
venting directors from focusing on substantive is-
sues during their limited interaction time. Ridge-
way and Johnson (1990), for example, argued that a
task group without status differentiation is likely to
have a high overall level of negative socioemotional
behavior, which is usually not task driven and thus
can hurt group solidarity and even survival (see
also Bales, 1970). Without status differentiation,
disagreements among group members are more
likely, and such disagreements, despite their task-
oriented and cognitive origin, can cause negative
December
emotional reactions (Ridgeway, Johnson, &
Diekema, 1994). Corroborating these findings and
views, Groysberg and colleagues (2009) showed
that a group composed of many stars (that is, lack-
ing clear rank differentiation) is likely to be inef-
fective and inefficient, even if the average task-
performing ability is high. Johnson (2004), in a field
study of the board dynamics of a family firm, pro-
vided even more direct and vivid evidence of how
the lack of rank differentiation between directors
challenges a board’s functioning:
This repeated pattern of behavior was concerned
with establishing dominance. In particular, between
two directors (Adrian and Alun [similar in rank])
who were found to be continually battling with one
another . . . It appeared that whenever Alun and
Adrian engaged in a discussion, one of them had to
win . . . Note how frequently they interrupt each
other, fail to fully listen to one another and the
extent to which their battle and not the substantive
issue held the greater interest for them. (2004: 44)
To summarize the discussion thus far, the clarity
of the informal hierarchy based on the amount of
respect that directors receive from each other is
likely to affect the coordination among them and
thus the effectiveness of board interactions. A clear
hierarchical order provides clear guidance about,
for example, when to speak, how to speak, and with
whom to talk, making board interactions smoother
and more effective. On the contrary, an ambiguous
hierarchical order tends to confuse directors and
leads them to stumble into destructive confronta-
tions that are likely to escalate to “affective con-
flicts” (Huse, 2007: 223–224). Thus, the coordina-
tion benefits of an informal hierarchy are likely to
help directors more effectively and efficiently ac-
complish their critical tasks, such as hiring/firing
CEOs, setting executive compensation, and ratify-
ing strategic decisions, all of which can have a
significant impact on firm financial performance.
Such impact is especially likely in recent years,
when boards, owing to rising public attention, have
been pressured to get more actively involved in
firms’ decision making by providing advice and
access to resources (Neff & Heidrick, 2006). Exactly
for this reason, Daily, Cannella, and Dalton (2003)
called for more attention to the multiple roles of
boards to ascertain their influence on firms’ finan-
cial performance under new circumstances.
One caveat is worth noting about the above pre-
diction. It is possible that clear hierarchical differ-
entiation suppresses diverse opinions and thus re-
duces the quality of group decisions, as Finkelstein
and Mooney (2003) warned. Higher-ranking direc-
tors may suppress dissenting voices (actively or
2011
unconsciously), and lower-ranking directors may
choose not to speak up. Still, the boardroom envi-
ronment tends to put a high premium on the coor-
dination benefits of an informal hierarchy. First,
time constraints and task ambiguity make boards
particularly vulnerable to “process losses” (Forbes
& Milliken, 1999; Huse, 2007). Lengthy debates,
although possibly generating more ideas, risk lead-
ing a board to reaching no conclusions. Second,
boards are composed of the elite of the corporate
world. As Johnson’s (2004) case study showed, di-
rectors generally want their voices to be heard. The
concern, then, is usually not whether there is suf-
ficient diversity of opinion, but whether an indi-
vidual director takes up too much “air time” in
board meetings defending his/her ideas (Carter &
Lorsch, 2004: 168). Exactly for this reason, search
professionals emphasize consensus building as the
most important skill when recruiting directors
(Dysart & Sharpe, 2005). Third, the informal hier-
archy on a board may actually encourage diverse
yet constructive opinions. Since higher social rank
is often associated with greater social and psycho-
logical rewards and comfort (Goode, 1978; Magee &
Galinsky, 2008; Tannenbaum, Kavcic, Rosner, Vi-
anello, & Wieser, 1974), lower-ranking directors
are motivated to climb the informal hierarchical
ladder. Contributing sound ideas can greatly im-
prove their confidence and recognition in the
corporate community, especially when more
prestigious board members endorse their ideas.
Hypothesis 1. Ceteris paribus, the clarity of the
informal hierarchy of a firm’s board of direc-
tors based on the directors’ deference for each
other is positively related to the financial per-
formance of the firm.
Internal and External Contingencies
The effectiveness of the informal hierarchy in
coordinating a board’s interactions is likely to de-
pend in part on factors internal and external to the
board. To the extent that an informal hierarchy
constitutes a deference order and thus a social co-
ordination mechanism, who controls this mecha-
nism is likely to influence whose interests the in-
formal hierarchy serves and what influence it has
on board and firm performance. And, to the extent
that an actor’s social position (e.g., high, middle, or
low rank) in the corporate community determines
his/her sociopsychological orientation and actions,
a board’s overall rank composition may influence
members’ sensitivity to the informal hierarchy and
thus their willingness to rely on it to guide their
interactions. Furthermore, the functioning of the
He and Huang 1123
informal hierarchy may depend on the extent to
which directors can easily retrieve information
about and act by the rank order among them. These
considerations suggest three internal contingen-
cies: the rank of a firm’s CEO in the board informal
hierarchy, the overall rank composition of a board,
and the size of the board. As for external contin-
gencies, we suggest that crises and a highly chal-
lenging business environment may place greater
demands on an informal hierarchy to guide board-
room interactions, as effective coordination is es-
pecially needed in such situations (Boyd, 1995;
Mace, 1986). This study examined two indicators of
such situations: past firm performance and envi-
ronmental dynamism.
The CEO’s rank in informal hierarchy. The dis-
cussion thus far has treated the board of directors as
a group without distinguishing the formal roles of
the individual directors. Yet, as the informal hier-
archy is only an implicit social structure, the for-
mal role distinctions among board members can
influence its functioning. One particularly impor-
tant role distinction is that between a firm’s CEO
and the rest of its board, which has been the focus
of many previous studies of corporate boards (Dal-
ton et al., 2007). Agency theory emphasizes that a
CEO’s interests can diverge from those of a firm’s
owners and that its board serves as a control mech-
anism to align the interests of the two parties (e.g.,
Jensen & Meckling, 1976). It then stands to reason
that if an informal hierarchy indeed influences
board interactions, whether the CEO has the high-
est rank in the informal hierarchy is likely to affect
how this tacit social structure is used. If the CEO
has the highest rank in the informal hierarchy, he/
she has an enhanced capacity to influence other
directors to yield substantially, if not entirely, to
his/her points of view. This gives him/her great
latitude in pursuing a self-interested agenda,
should he/she so desire. Accordingly, the firm’s
agency costs (the costs of nonaligned interests) may
increase, and its economic performance may suf-
fer (Eisenhardt, 1989a; Jensen & Meckling, 1976).
By contrast, if another director leads, the infor-
mal structure can give him/her legitimacy and
the confidence to stimulate constructive debates
challenging the CEO whenever necessary. This
would reduce agency costs and enhance the
firm’s financial performance. Thus, whether the
CEO occupies the highest rank in the informal
hierarchy is likely to affect the extent to which
agency costs offset the informal hierarchy’s coor-
dination benefits.
Hypothesis 2. Ceteris paribus, the positive re-
lationship between the clarity of the informal
1124 Academy of Management Journal
hierarchy of a firm’s board and the firm’s fi-
nancial performance is weaker when the CEO
has the highest rank in the informal hierarchy.
The rank composition of a board. One funda-
mental insight of the sociological perspective is
that rewards are largely a function of actors’ posi-
tions in social structures, with more rewards accru-
ing to higher positions (Simmel, 1950). As a result,
actors occupying different social positions may
have different social-psychological orientations
and thus behave differently. Scholars often classify
positions in a hierarchical structure as high, mid-
dle, or low (Phillips & Zuckerman, 2001). High-
ranking actors already occupy the most advanta-
geous positions and are poised to claim rewards
attached to those positions, so they usually feel
secure. Low-ranking actors occupy the least advan-
tageous positions and often find it difficult to move
up, so they may become relatively disinterested in
climbing the hierarchy. High- and low-ranking ac-
tors are thus likely to be less sensitive to hierarchi-
cal order than middle-ranking ones. Middle-rank-
ing actors, although not occupying the most
advantageous positions, covet the rewards claimed
by high-ranking actors and at the same time are
better positioned than low-ranking actors, so they
are more motivated to move up. Moreover, middle-
ranking actors, although having better prospects for
moving up than low-ranking ones, tend to feel in-
secure about their position, and such a sense of
insecurity is likely to make them particularly sen-
sitive to issues that have status implications. One
particular manifestation of this general pattern is
the often observed “middle-status conformity” phe-
nomenon (e.g., Blau, 1960; Homans, 1961; Phillips
& Zuckerman, 2001), wherein middle-status mem-
bers are more likely to conform to, for example,
group norms than either low- or high-status mem-
bers, as conformity has implications for their status
in the group.
To the extent that actors of different ranks are
differentially sensitive to and thus exhibit differing
propensities to act by rank order, whether a board
is mainly composed of individuals who are low-,
middle-, or high-ranking in the corporate commu-
nity should affect the extent to which the board’s
informal hierarchy can facilitate board interactions.
In particular, directors are more likely to attend to
and to act in keeping with the informal hierarchical
order if they are mostly middle-ranking rather than
low- or high-ranking. Consequently, the same level
of hierarchical differentiation is likely to better fa-
cilitate the interactions of a board composed mostly
of middle-ranking directors than of a board com-
December
posed mostly of low- and high-ranking directors.2
In other words, although all directors are generally
aware of the existence of the informal hierarchy, a
board that is mainly composed of middle-ranking
directors should be more attentive to it and thus
more willing to use it to guide their interactions
than boards with other compositions. This reason-
ing suggests that the effect of its board’s informal
hierarchy on firm financial performance is likely to
depend on the average rank of the board’s directors
in the corporate community.
Hypothesis 3. Ceteris paribus, the positive re-
lationship between the clarity of the informal
hierarchy of a firm’s board and the firm’s fi-
nancial performance is likely to be stronger
when the directors’ ranks on average are me-
dium rather than low or high.
Board size. A board’s informal hierarchy, by def-
inition, is not explicitly stated in any form; it exists
only tacitly as a collective understanding (Magee &
Galinsky, 2008; Ridgeway, 2006). The rank order,
once sorted out, is not going to automatically influ-
ence directors’ interaction with each other. Rather,
board members need to retrieve the rank order from
memory whenever board members interact (see
Tversky and Kahneman [1974] for a discussion of
such retrieving). This is by no means a trivial pre-
condition, given the simple fact that individuals
are cognitively constrained in processing informa-
tion (Miller, 1956; Simon, 1957). The cognitive bur-
den is heightened in the board context, because
directors who do not meet each other often must go
through a large number of documents and discuss
many issues during their relatively short meetings
(Finkelstein & Mooney, 2003). Given that the level
of cognitive effort needed to process information is
likely to be proportional to the amount of informa-
tion, a board’s size is likely to be important in
determining the extent to which directors can act
according to the informal hierarchy. Directors on a
small board may be able to easily recall their rank
order, as retrieving information about a small num-
ber of directors does not require much cognitive
effort. By contrast, for directors on a big board,
retrieving the rank order may be cognitively taxing,
not to mention less than completely accurate. Thus,
2
Note that the trichotomy of high, middle, and low
ranks does not mean that actors within each category are
of the same rank. It is intended rather to define the range
of actors falling into each category. Thus, a certain degree
of hierarchical difference still exists among actors in each
rank category. A similar example is the distinction
among top-, middle-, and low-level managers in organi-
zations.
2011 He and Huang
it may be more challenging for directors on a big
board to have their rank order guide their interac-
tions and decision making than it is for directors on
a small board.
The preceding discussion suggests that the effect
of the clarity of the informal hierarchy is likely to
be stronger in smaller than in bigger boards. How-
ever, one may argue that bigger boards are more
likely to suffer from process loss because of the
complexity of interactions among their members. It
then stands to reason that bigger boards are in
greater need of structures such as an informal hier-
archy to guide their decision-making processes.
However, a need for structures does not guarantee
that an informal hierarchy, an essentially tacit so-
cial structure, automatically benefits a particular
board. An informal hierarchy benefits a board only
if it functions effectively. Given that it is more
cognitively challenging for directors on big boards
to retrieve and act by their rank order than for those
on small boards, it may be harder for the proposed
benefits of an informal hierarchy to be realized in
firms with bigger boards.
Hypothesis 4. Ceteris paribus, the positive re-
lationship between the clarity of the informal
hierarchy of a firm’s board and the firm’s fi-
nancial performance is weaker when the firm’s
board is bigger.
Past firm performance. Directors are charged
with setting and supervising firm strategies. Past
performance provides feedback and serves as a cue
for directors to determine what and how much of
such activity is called for (Mace, 1986; Pearce &
Zahra, 1992). A firm’s poor past performance may
indicate a crisis at the top (Chatterjee & Harrison,
2001; Mace, 1986), and crises often lead to conflict.
For example, directors may question the manage-
ment and each other for decisions that may have
led to the poor performance (i.e., engage in finger
pointing). Moreover, in such a situation, directors
tend to disagree about future directions, especially
if there is substantial uncertainty about the cause(s)
of the firm’s poor performance. In such a conflict-
ridden situation, order is much needed to get di-
rectors to work together searching for a way to bring
the firm back on track. The informal hierarchy may
then become particularly important for guiding
boardroom interactions by providing a clear defer-
ence order that minimizes destructive conflicts. By
contrast, a firm’s financial success can give rise to
complacency and reliance on current organiza-
tional routines, so that directors may feel no need
to question the firm’s current strategies (cf. Ferrier,
2001; Lant, Milliken, & Batra, 1992). Conflicts are
less likely to arise in this situation. Moreover, as
1125
the board’s involvement in firm strategies is gener-
ally reduced in good times, the need for the infor-
mal hierarchy may be low.
Hypothesis 5. Ceteris paribus, the positive re-
lationship between the clarity of the informal
hierarchy of a firm’s board and the firm’s fi-
nancial performance is likely to be weaker
when the firm’s past performance was better.
Environmental dynamism. Environmental dy-
namism in business contexts refers to volatility in
an industry (Boyd, 1995; Dess & Beard, 1984).
Highly dynamic industries are characterized by fre-
quent, relatively unpredictable changes in their
business environment. In such industries, firms of-
ten find quick decisions critical to their perfor-
mance (Bourgeois & Eisenhardt, 1988; Judge &
Miller, 1991). Eisenhardt (1989b) showed that
skills in resolving conflicts affect speed in making
strategic decisions. Moreover, Keats and Hitt (1988)
reported that successful firms often deal with dy-
namism by creating simpler organizational struc-
tures, because simplicity and clarity often result in
faster responses and increased accountability
(Boyd, 1995). These findings suggest that the coor-
dination benefits of an informal hierarchy, which
are instrumental for effective boardroom interac-
tions and consensus building, are likely to be even
more important for firms operating in highly dy-
namic environments. In other words, in such envi-
ronments, a board’s vulnerability to process losses
(Forbes & Milliken, 1999; Huse, 2007) is height-
ened, which calls for greater boardroom efficiency.
Hypothesis 6. Ceteris paribus, the positive re-
lationship between the clarity of the informal
hierarchy of a firm’s board and the firm’s fi-
nancial performance is likely to be stronger
when the firm’s industry environment is more
dynamic.
METHODS
Sample and Data
We tested these hypotheses using a sample of
United States manufacturing firms with four-digit
SIC codes ranging from 2000 to 3999. Manufactur-
ing firms not only provide a valid basis for statisti-
cal analysis, but also regularly report a variety of
variables such as R&D investment and advertising
expenditures. These variables have been regarded
as important contributors to firm performance, the
dependent variable for this study. We extracted
information related to these firms’ directors and
board compositions from 2001 to 2007 from the
Corporate Library database, which contains archi-
1126 Academy of Management Journal
val information about a great variety of board and
director variables. Compustat provided informa-
tion about other firm- and industry-level variables
for the same time period. After merging and match-
ing the data retrieved from these two databases, we
ended up with a panel data set with 530 firms and
2,157 observations.
Measures
Dependent variable. This study examined the
performance effect of the informal hierarchy among
directors, a tacit social structure internal to a board.
In keeping with the tradition in corporate gover-
nance research and other recent studies with a sim-
ilar focus on the internal processes in top corporate
echelons (e.g., Cannella, Park, & Lee, 2008; Carpen-
ter, 2002), we adopted return on assets (ROA) as the
measure of each firm’s financial performance. We
calculated ROA (with one-year lead) using net in-
come (or loss) and the total assets reported by a firm
for each year. Industry effects were corrected for by
including industry average ROA as a control in the
analyses. In general, accounting measures such as
ROA are considered to reflect the influence of in-
ternal management better than market-based mea-
sures, which are more subject to exogenous eco-
nomic factors (Elitzur & Yaari, 1995; Hutchinson &
Gul, 2004). One concern is that ROA may mainly
reflect firms’ short-term financial performance, but
board influence is often considered to be longer-
term. However, recently, especially since the pas-
sage of the Sarbanes-Oxley Act (SOX) in 2002,
boards and directors have increasingly been held
accountable for short-term operating results and
financial performance (e.g., Daily et al., 2003; Neff
& Heidrick, 2006). Since our data mainly cover a
period after these significant changes, ROA may at
least partly capture the contributions of boards to
firm performance, and any failure of ROA to reflect
the effect of board processes would simply make it
difficult to find support for our hypotheses.
Independent variable. This study is concerned
with the informal hierarchy that implicitly forms
among directors on a board on the basis of the
deference they receive from each other. The ideal
way of quantifying the informal hierarchy would be
to survey the directors about their deference toward
other directors, but this approach is almost impos-
sible for large-scale studies such as this one, be-
cause getting access to and (reliable) responses
from directors is notoriously difficult and costly,
and proper analysis would require responses from
all the members of many boards (Johnson, 2004;
McNulty & Pettigrew, 1999). An alternative is to
use appropriate proxies, if the basis on which the
December
informal hierarchy among directors is formed can
be identified. Although such an approach may
compromise measurement precision, it has the ad-
vantage of allowing for a large-scale study that
would be nearly impossible otherwise. We adopted
this latter approach, as previous studies of boards
have suggested a possible way of detecting the in-
formal hierarchy among directors—that is, the
number of corporate boards that a director simul-
taneously serves.
In Mace’s seminal book about the world of direc-
tors, an individual revealed an insider’s under-
standing of what it means to hold positions on
several boards: “If I can be on seven boards, I have
seven medals and citations, and I’m better than the
guy with four” (Mace, 1986: 105). Although this
observation was made some years ago, the status-
signaling effects of board membership likely re-
main largely unchanged in today’s corporate com-
munity. Boards select directors for various reasons
(e.g., Westphal & Zajac, 1996), but they generally
prefer those who are demonstrably experienced
and skillful (Davis et al., 2003), and this preference
has been even more emphasized since the passage
of the SOX Act (Neff & Heidrick, 2006).3 Conse-
quently, experienced and competent director can-
didates are highly sought after and likely to be
invited to sit on multiple boards. So being invited
to join a board reflects others’ recognition and def-
erence based on intellectual competence and social
influence. Invitations to join multiple boards only
confirm and reinforce such recognition and defer-
ence (Belliveau et al., 1996; D’Aveni, 1990). More-
over, directors all belong to a resourceful commu-
nity of corporate elite members who are
interconnected through interlocking board mem-
berships (Mizruchi, 1996; Useem, 1984). Director-
ship thus allows an individual, for example, to
learn about strategic practices in other corporations
directly through observation and indirectly
through ties with directors sitting on their boards
(e.g., Beckman & Haunschild, 2002; Davis, 1991;
Haunschild, 1993). Directors with more board
memberships have better access to strategic infor-
mation. These benefits, as well as many others,
allow directors to be more competent, influential,
3
In fact, in the post-SOX era firms are stricter in eval-
uating candidates for director positions, and directors are
more serious about their decisions to join multiple
boards (Neff & Heidrick, 2006). As a result, board mem-
berships are likely to provide more credit for directors’
competence and influence, further validating using
board memberships to capture the deference that each
director receives. We thank an anonymous reviewer for
reminding us of this.
2011 He and Huang
FIGURE 1
An Illustration of the Inequality of Board Memberships
and thus respected. On the basis of post-SOX field-
work, Neff and Heidrick reported that director
candidates value “the intangible rewards of board
services—affiliation with highly respected corpora-
tions and other directors, exposure to other gover-
nance processes and the opportunities to gain new
ideas valuable to their own company” (2006: 1) as
important factors in their decisions to join boards.
This evidence and argument suggest that directors
may draw on the number of board memberships to
assess each other’s competence and influence. So
board memberships may at least roughly affect and
reflect the deference order among directors.
Given this understanding of the causes and im-
plications of board memberships, we used the
number of board memberships held by a director as
a proxy measure of the amount of respect he/she
receives from other directors. To further take into
account the possible diminishing marginal effect of
each additional board membership in reflecting
deference,4 we logarithmically transformed the raw
number of board memberships. We were interested
in the clarity of the informal hierarchy among di-
rectors on a board—that is, the degree to which the
directors are differentiated hierarchically. Blau
(1977) suggested that the degree of hierarchical dif-
ferentiation can be easily measured using the Gini
4
We thank an anonymous reviewer for pointing out
this possibility.
1127
coefficient (Gini, 1912/55), which has been used to
measure the inequality of many continuous and
cardinal variables (e.g., income, consumption,
number of children) (Atkinson, 1983). In this case,
the variable of concern is directors’ board member-
ships. We thus measured the clarity of the informal
hierarchy among directors on a board by board
membership inequality. A standard specification of
the Gini coefficient is:
2cov共 y, ry兲
G⫽ N៮ y ,
where G denotes the Gini coefficient; y, the total
number of board memberships (log-transformed)
held by each director of a firm’s board; ry, the rank
of each director according to board memberships;
cov(y, ry), the covariance of y and ry; N, the number
of directors on the board; and ៮ y, the mean of y
(Lerman & Yitzhaki, 1984; Pyatt, Chen, & Fei,
1980). Figure 1 graphs the Gini coefficient. The
straight diagonal line is the absolute equality line,
and the other two lines are the Lorenz curves for
two selected boards. Let A designate the area be-
tween the Lorenz curve and the line of equality and
B the total area under the line of equality. The Gini
coefficient, calculated as A divided by B, thus,
ranges from 0, indicating a situation of absolute
equality in which all actors have the same value of
y, to 1, indicating a situation of absolute inequality
in which the value of y equals 0 for all but one
1128 Academy of Management Journal
actor. We used the Stata software package with the
user-developed command “inequal” to calculate
the Gini coefficient for board memberships. The
correlation between the Gini and other inequality
measures (relative mean deviation, coefficient of
variance, Mehran measure, Piesch measure, Kak-
wani measure, and Theil entropy measure) was
above .95 in each case, indicating the reliability of
this measure. Moreover, the Gini coefficient of
board memberships varied considerably not only
across but also within firms during the study pe-
riod. The within-firm variance came from three
sources: (1) change in directors for a firm (i.e., some
directors left and others joined a board), (2) change
in a firm’s board size, and (3) change in the number
of boards on which a director served.
One possible concern about this approach is that
which boards a director serves on may matter more
than the absolute number, because sitting on the
board of a big, prestigious corporation is probably
considered more valuable than sitting on the
boards of several smaller firms. This concern sug-
gests that a measure of the clarity of a board’s
informal hierarchy should weight board member-
ships by the sizes of the corporations involved.
However, research on board interlocking has
shown that there is often a high degree of “homoph-
ily” in interlocking directorships (e.g., Davis et al.,
2003; Useem, 1984)— big corporations tend to have
directors who simultaneously sit on the boards of
other big corporations. This has both theoretical
and empirical implications for our measurement
approach. Theoretically, to the extent that directors
differ little in terms of the sizes of the other corpo-
rations on whose boards they also sit, number of
boards constitutes a fairly reliable signal for defer-
ence. Empirically, if we were to weight board mem-
berships by the sizes of the corporations involved,
it should not matter substantially, as the weight
would differ little among the directors sitting on
the same board. In other words, hierarchy measures
based on weighted and unweighted board member-
ships should be highly correlated. To validate this
idea, we randomly selected a subsample of 50 firms
from our data and collected the information needed
to do the weighting. Missing data brought the num-
ber of firms in the subsample down to 46. We
calculated the Gini coefficients for both weighted
and unweighted board memberships, and the two
were highly correlated (r ⫽ .86) despite the small
sample, thus confirming the validity of the un-
weighted measure used in our analysis.
Another possible concern about our proxy mea-
sure is that board memberships may also indicate
something other than competence and influence. In
particular, the number of a director’s board seats
December
may represent how busy he/she is or perhaps how
friendly he/she is with the managements involved
(Harris & Shimizu, 2004). Directors with different
board seat counts might thus vary in the quality of
service they offer. Even so, as long as a director
attends board meetings, deference order should
still influence how other directors interact with
him/her. Moreover, there seems to be no strong
theoretical reason why inequality in directors’
busyness or friendships should affect firm financial
performance, and thus these factors are unlikely to
confound the effect of inequality in board member-
ships as an indicator of the rank order among di-
rectors. Finally, such concerns, if indeed real, are
greatly lessened because this study mainly covers a
time period during which directors were under
enormous pressure to be cautious about serving on
multiple corporate boards (Neff & Heidrick, 2006).
Moderating variables. To test Hypothesis 2, we
constructed the dummy variable, CEO has highest
informal rank, which took the value of 1 when a
firm’s CEO held more board memberships than any
other director. To test Hypothesis 3, we first com-
puted the average number of directors’ board mem-
berships for each board and then the sample mean
and standard deviation. We then created a dummy
variable, middle-ranking board, coded 1 if the av-
erage number of board memberships of a particular
board fell within one standard deviation of the
mean, and 0 otherwise (signifying a low- or high-
ranking board).5 One possible concern about using
the average specification to construct this measure
is that the average may not mathematically distin-
guish a board composed mainly of directors with
the medium number of board memberships from a
board composed mainly of directors with high and
low membership numbers. This is certainly possi-
ble. Yet, since these two types of boards are obvi-
ously different in their degree of inequality, con-
trolling for inequality in the analysis, as we did,
should account for this possible concern.6 To test
Hypothesis 4, board size was captured by the total
number of directors on a board.
5
We also experimented with splitting the sample ac-
cording to different cutting points (e.g., 25%), and the
results were not materially different from those reported.
6
Note that the dummy variable of middle-ranking
board, given how it is constructed, also essentially cap-
tures the board connections that a firm has, though prob-
ably only approximately. Alternatively, to account for
the possible effects of a firm’s social connections through
its board, we also experimented with including directors’
total number of board memberships as a control variable.
This variable did not affect the estimated effect of infor-
mal hierarchy.
2011
To test Hypothesis 5, we measured past firm
performance by the previous year’s ROA (t – 1).7
Besides, including past firm performance helps ad-
dress the possibility of reverse causality whereby
the clarity of a board’s informal hierarchy corre-
lates with a firm’s financial performance simply
because successful firms are able to attract a few
competent directors with many board seats, result-
ing in a highly differentiated informal hierarchy.
To test Hypothesis 6, we captured environmental
dynamism with a standardized measure of the vol-
atility of industry sales growth rate over the five
preceding years (Boyd, 1995; Dess & Beard, 1984;
Keats & Hitt, 1988). Specifically, we first summed
the net sales for all the Compustat firms in each of
the four-digit SIC industries for each year between
1996 and 2006. We then employed five years of the
four-digit primary SIC industry-level data to gauge
environmental dynamism for the sixth year. For
each year and each industry, we regressed the five
previous years’ industry sales against year. Envi-
ronmental dynamism was then quantified in terms
of the standard error of the regression’s slope coef-
ficient divided by the mean value of industry sales
over the five-year period. Note that using the four-
digit SIC code of a firm’s primary business may not
accurately reflect diversified firms spanning multi-
ple four-digit SIC codes. This approach was an
empirical compromise, as more detailed data about
diversified firms’ sales in each industry were not
available. To the extent that some of the firms in the
sample were diversified, this rough measure may
render our tests conservative.
Control variables. To rigorously test the hypoth-
eses, we included control variables measured at
board, firm, industry, and institution levels. The
most important controls were for factors that might
confound any effect of the informal hierarchy as
measured by directors’ board memberships. Al-
though there are strong reasons to believe that our
proxy is salient in the board context, hierarchical
orders might perhaps be based on director age,
tenure, gender, or other factors. To isolate the effect
of the informal hierarchy, we controlled for direc-
tor age inequality, director tenure inequality, and
director gender diversity. Gini coefficients were
used to represent age and tenure inequality. Gender
diversity was measured using Blau’s (1977) heter-
ogeneity index. We also included in the analyses
average director age and average director tenure.
To at least partly account for the effects of directors’
7
The statistical results proved indifferent to different
specifications of past firm performance based on two-,
three-, or four-year moving averages.
He and Huang 1129
expertise, we included as a control active CEOs,
which was the percentage of directors who were
active CEOs.
Besides the informal hierarchy, boards also
have formal structural characteristics, which pre-
vious studies have often examined (Dalton et al.,
2007). Specifically, we controlled for outsider
ratio and CEO duality. Outsider ratio was the
percentage of independent outside directors.
CEO duality was represented by a dummy vari-
able with the value of 1 if the CEO of a given firm
also chaired its board. It is also worth noting that
committees are established as formal structures
to organize board functions.8 Boards typically
have at least audit, compensation, and gover-
nance committees. To some extent, committees
as formal coordination structures are naturally
controlled for in our data, with over 99 percent of
the firms having an independent audit commit-
tee, over 98 percent an independent compensa-
tion committee, and over 97 percent an indepen-
dent governance committee. Given almost no
variance in whether firms had these committees,
there was no statistical need to control for them
in the analysis. Admittedly, the committees in
different firms may not be identical, but we were
unable to capture such nuances with the data
available. In any case, the Arellano-Bond linear,
dynamic panel data estimation employed in this
study effectively deals with firm-level omitted
variables.
Finally, we also controlled for firm, industry, and
institutional factors likely to either affect a firm’s
financial performance or confound the effect of the
board’s informal hierarchy. Firm size was mea-
sured by the natural logarithm of the firm’s total
number of employees (e.g., Judge & Zeithaml, 1992;
Tuschke & Sanders, 2003). Firm age was measured
by subtracting the year of establishment from the
current year. R&D intensity, often considered an
important predictor of a firm’s economic perfor-
mance (e.g., Cannella et al., 2008), was calculated
by dividing each firm’s yearly R&D expenditure by
8
We thank an anonymous reviewer for bringing up
this point. Addressing this issue regarding formal ar-
rangements in boards may potentially help enrich peo-
ple’s understanding of how informal hierarchies func-
tion in boards. But such formal arrangements may not
fundamentally change the effect of an informal hierar-
chy as predicted in this study, given the long-estab-
lished wisdom about the deep impact of “the organi-
zation behind the chart” (Krackhardt & Hanson, 1993;
Merton, 1940) and the concerns about the extent to
which formal board structures are effective (Finkel-
stein & Mooney, 2003).
 TABLE 1
Descriptive Statistics and Correlationsa
　 Variables Mean s.d. 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22

1. Firm ROA 0.02 0.18

2, Industry average ROA ⫺1.56 20.40 .01
3, Sarbanes-Oxley Act 0.77 0.42 .11 .02
4, Firm size 1.80 1.56 .21 ⫺.03 ⫺.04
5, Firm age 3.55 0.97 .18 ⫺.02 .01 .30
6, R&D intensity 0.09 0.41 ⫺.33 .01 ⫺.02 ⫺.27 ⫺.18
7, Advertising intensity 0.01 0.03 .02 .02 ⫺.01 .04 .05 ⫺.01
8, CEO duality 0.66 0.48 .05 ⫺.02 .01 .16 .10 ⫺.08 .06
9, Outside director ratio 0.75 0.12 .07 ⫺.03 .15 .24 .15 ⫺.07 .00 .17
10. Insider ownership 0.15 0.17 ⫺.08 ⫺.02 ⫺.21 ⫺.19 ⫺.01 .00 .04 ⫺.04 ⫺.29
11. Institutional ownership 0.65 0.35 .09 .00 .03 .07 .05 ⫺.03 ⫺.03 .06 .13 ⫺.11
12. Active CEOs 0.34 0.29 ⫺.09 ⫺.01 ⫺.83 .06 .01 .00 ⫺.01 .04 ⫺.04 .06 ⫺.01
13. Director gender diversity 0.16 0.13 .14 .00 ⫺.01 .40 .22 ⫺.15 .11 .12 .25 ⫺.10 .03 .01
14. Director age inequality 0.02 0.01 ⫺.10 .00 ⫺.03 ⫺.15 ⫺.12 .09 .11 ⫺.19 ⫺.31 .12 ⫺.08 ⫺.09 ⫺.02
15. Director tenure inequality 0.20 0.07 .03 ⫺.01 ⫺.04 .12 .15 ⫺.01 .02 ⫺.09 .06 ⫺.05 ⫺.01 .01 .09 .06
16. Average director age 4.09 0.06 .07 .02 .04 .18 .13 ⫺.05 ⫺.04 .08 .08 ⫺.06 .06 ⫺.08 ⫺.05 ⫺.28 ⫺.09
17. Average director tenure 2.02 0.35 .07 .02 .06 ⫺.09 .16 ⫺.01 .01 ⫺.01 ⫺.29 .18 ⫺.02 ⫺.09 ⫺.17 .09 ⫺.43 .36
18. Board size 9.18 2.33 .18 ⫺.02 ⫺.03 .59 .30 ⫺.14 .13 .03 .19 ⫺.09 .02 ⫺.02 .38 ⫺.02 .17 .12 ⫺.07
19. CEO has highest informal rank 0.09 0.28 .06 .02 .00 ⫺.12 ⫺.01 ⫺.04 ⫺.02 .03 ⫺.13 .08 .00 .00 ⫺.07 .04 ⫺.08 .02 .18 ⫺.11
20. Middle-ranking board 0.52 0.50 ⫺.06 .00 ⫺.06 ⫺.24 ⫺.05 .04 ⫺.03 ⫺.07 ⫺.10 .18 ⫺.02 ⫺.01 ⫺.09 .15 .04 ⫺.10 .03 ⫺.15 ⫺.03
21. Past firm performance (t – 1) 0.03 0.18 .70 .00 .03 .20 .19 ⫺.34 .03 .03 .06 ⫺.05 .07 ⫺.02 .17 ⫺.08 .04 .07 .07 .20 .05 ⫺.07
22. Environmental dynamism 0.03 0.03 ⫺.05 .00 .00 ⫺.17 ⫺.10 .03 ⫺.12 ⫺.03 ⫺.07 .01 ⫺.03 .00 ⫺.22 .00 ⫺.05 ⫺.01 .01 ⫺.20 .06 .06 ⫺.10
23. Clarity of board informal hierarchy 0.21 0.11 ⫺.04 .00 .07 .05 .03 .01 .02 ⫺.02 .14 ⫺.10 .04 ⫺.07 .10 .00 .12 .02 ⫺.16 .06 ⫺.33 .25 ⫺.04 .00

a
Correlation coefficients greater than 0.03 are statistically significant at p ⬍ .05; n ⫽ 2,157.
2011 He and Huang
its total assets. Advertising intensity, calculated by
dividing each firm’s yearly advertising expenditure
by total assets, was also included (e.g., Kor & Ma-
honey, 2005). We also controlled for two owner-
ship variables, insider ownership and institutional
ownership, which were measured by the percent-
ages of outstanding shares held by a firm’s top
managers and by institutional investors, respec-
tively (Dalton et al., 2007). To control for the effects
of industry, we included industry average perfor-
mance, calculated as average ROA at the four-digit
SIC code level. Finally, the enactment of the Sar-
banes-Oxley Act in 2002 is considered one of the
biggest institutional changes related to corporate
governance in the United States (Neff & Heidrick,
2006), and we captured this change with a dummy
variable coded 1 for years after its passage.
Statistical Estimations
The data comprised a panel with 530 manufac-
turing firms repeatedly observed during the
2001– 07 study period, and the dependent variable,
ROA, was continuous. The data had two notable
features. First, the number of time periods (T) is
small, but the number of panels or cases (N) is
large. Second, properly testing the hypotheses (Hy-
pothesis 4 in particular) required including the
lagged dependent variable (ROA) as a covariate.
The lagged dependent variable was intrinsically
correlated with the unobserved panel-level effects,
giving inconsistent standard estimators from fixed-
or random-effects linear regression models. A par-
ticular solution to this problem is a consistent gen-
eralized method-of-moments (GMM) estimator for
the parameters (Arellano & Bond, 1991; Arellano &
Bover, 1995; Greene, 2003). We estimated this
model using the “xtabond” module provided in the
Stata 10 software package.
Table 1 presents descriptive statistics and a cor-
relation matrix for the variables. The hypothesized
variables did not correlate strongly with one an-
other or with the control variables, easing concerns
about multicollinearity. However, testing some of
the hypotheses entailed including interaction
terms in the analyses. To check whether including
interaction terms resulted in multicollinearity
problems, we also mean-centered the variables be-
fore forming interaction terms and reran all the
analyses. The results from these analyses were not
materially different from those reported.
RESULTS
Table 2 presents the results of the analyses.
Model 1 is the baseline model with all controls and
1131
moderating variables included. Noticeably, neither
inequality in directors’ ages or tenures nor director
gender diversity, all of which may confound the
effect of board membership inequality, was a sig-
nificant predictor of firm financial performance.
This observation tends to support the fundamental
idea that inequality in directors’ board member-
ships is likely to effectively reflect an informal hi-
erarchy based on directors’ deference for each oth-
er’s competence and influence rather than other
attributes such as age, tenure, and gender.
Hypothesis 1 states that the clarity of a board’s
informal hierarchy is likely to be positively related
to firm financial performance. In model 2, the esti-
mated coefficient of board membership inequality,
our proxy for the clarity of the informal hierarchy,
was statistically significant (p ⬍ .05) with a posi-
tive sign. Moreover, including this variable also
significantly improved model fit compared to
model 1, as indicated by the significant increase in
chi-square. Hypothesis 1 was thus supported. To
illustrate the effect size, consider the estimate in
model 2 (0.124 ⫻ board membership inequality).
All else being equal, when board membership in-
equality increases from a low level (1 s.d. below the
mean) to a high level (1 s.d. above the mean), firm
ROA is predicted to increase, on average, from 1.2
to 4 percent, a positive change of 2.8 percent. Given
the fact that the average ROA in our sample was
only around 2 percent, such a change is substantial.
Hypothesis 2 suggests that the clarity of a board’s
informal hierarchy is likely to be less important
when the CEO of the focal firm has the highest rank
in the informal hierarchy. As shown in model 3, the
estimated coefficient for the interaction between
the clarity of the informal hierarchy and the
dummy variable for the CEO having the highest
informal rank was not statistically significant (al-
though having the predicted negative sign). Thus,
Hypothesis 2 was not supported. A post hoc prob-
ing showed that our data included only a small
number of cases in which the CEO occupied the top
position in the informal hierarchy, which made it
statistically difficult to properly test Hypothesis 2.
This feature of our data echoes the fact that active
CEOs have become highly cautious about taking
outside board positions after the passage of the
SOX Act (Neff & Heidrick, 2006).
Model 4 tested Hypothesis 3, which predicts that
the positive effect of the clarity of an informal hi-
erarchy is likely to be stronger in boards whose
directors on average are of middle rank in the cor-
porate community. The estimated coefficient for
the interaction between the clarity of the informal
hierarchy and a middle-ranking board was statisti-
cally significant (p ⬍ .01) with the anticipated pos-
1132 Academy of Management Journal December

TABLE 2
Arellano-Bond Linear Dynamic Panel Data Regression Models Relating Clarity of
Board Informal Hierarchy with Firm Financial Performance
Variables Model 1 Model 2 Model 3 Model 4 Model 5 Model 6 Model 7

Constant 0.057 0.082 0.078 0.137 ⫺0.151 ⫺0.396 0.146

(0.590) (0.588) (0.587) (0.585) (0.586) (0.542) (0.588)
Industry average performance (ROA) 0.0001 0.0001 0.0001 0.0001 0.0001 0.0001 0.0001
(0.0001) (0.0001) (0.0001) (0.0001) (0.0001) (0.0001) (0.0001)
Sarbanes-Oxley Act 0.057** 0.057** 0.057** 0.056** 0.061** 0.071** 0.059**
(0.021) (0.021) (0.021) (0.021) (0.021) (0.019) (0.021)
Firm size ⫺0.027† ⫺0.027† ⫺0.027† ⫺0.029† ⫺0.026 ⫺0.023 ⫺0.027
(0.016) (0.016) (0.016) (0.016) (0.016) (0.015) (0.016)
Firm age 0.088** 0.089** 0.090** 0.092** 0.095** 0.125** 0.088**
(0.027) (0.027) (0.027) (0.027) (0.027) (0.025) (0.027)
R&D intensity 0.044* 0.044* 0.044* 0.042† 0.044* ⫺0.031 0.043*
(0.022) (0.022) (0.022) (0.022) (0.021) (0.019) (0.022)
Advertising intensity ⫺0.302 ⫺0.315 ⫺0.32 ⫺0.34 ⫺0.34 ⫺0.519* ⫺0.306
(0.260) (0.260) (0.259) (0.258) (0.257) (0.239) (0.259)
CEO duality ⫺0.001 ⫺0.002 ⫺0.002 ⫺0.002 ⫺0.002 ⫺0.009 ⫺0.003
(0.009) (0.009) (0.009) (0.009) (0.009) (0.009) (0.009)
Outside director ratio ⫺0.006 ⫺0.005 ⫺0.004 ⫺0.004 ⫺0.011 0.016 ⫺0.005
(0.045) (0.045) (0.045) (0.045) (0.044) (0.041) (0.045)
Percent of insider ownership ⫺0.018 ⫺0.009 ⫺0.008 ⫺0.006 ⫺0.006 ⫺0.023 ⫺0.009
(0.023) (0.024) (0.024) (0.024) (0.023) (0.022) (0.024)
Percent of institutional ownership ⫺0.009 ⫺0.009 ⫺0.009 ⫺0.009 ⫺0.008 ⫺0.012 ⫺0.009
(0.010) (0.010) (0.010) (0.010) (0.010) (0.009) (0.010)
Percent of active CEOs 0.008 0.008 0.009 0.009 0.013 0.039 0.01
(0.027) (0.027) (0.027) (0.027) (0.027) (0.025) (0.027)
Director gender diversity ⫺0.097† ⫺0.095† ⫺0.093† ⫺0.097† ⫺0.091† ⫺0.103* ⫺0.098†
(0.052) (0.052) (0.052) (0.051) (0.051) (0.048) (0.051)
Director age inequality ⫺0.7 ⫺1.014 ⫺1.043 ⫺1.212 ⫺0.959 ⫺0.467 ⫺1.109
(1.274) (1.276) (1.275) (1.269) (1.265) (1.179) (1.274)
Director tenure inequality 0.054 0.036 0.034 0.025 0.035 0.051 0.041
(0.080) (0.080) (0.080) (0.079) (0.079) (0.074) (0.080)
Director average age ⫺0.089 ⫺0.1 ⫺0.101 ⫺0.107 ⫺0.074 ⫺0.008 ⫺0.11
(0.149) (0.148) (0.148) (0.148) (0.147) (0.137) (0.148)
Director average tenure 0.015 0.012 0.01 0.008 0.008 ⫺0.003 0.013
(0.029) (0.029) (0.029) (0.029) (0.029) (0.027) (0.029)
Board size 0.001 0.002 0.002 0.003 0.015** ⫺0.001 0.002
(0.003) (0.003) (0.003) (0.003) (0.005) (0.003) (0.003)
CEO has highest informal rank 0.005 0.009 0.026 0.005 0.013 ⫺0.014 0.009
(0.012) (0.012) (0.022) (0.012) (0.012) (0.011) (0.012)
Medium-ranking board ⫺0.002 ⫺0.004 ⫺0.003 ⫺0.053** ⫺0.002 0.004 ⫺0.003
(0.008) (0.008) (0.008) (0.019) (0.008) (0.007) (0.008)
Past firm performance 0.350** 0.346** 0.344** 0.341** 0.338** 1.351** 0.344**
(0.030) (0.030) (0.030) (0.029) (0.029) (0.060) (0.029)
Environmental dynamism 0.271 0.261 0.267 0.268 0.261 0.273 ⫺0.433
(0.199) (0.198) (0.198) (0.197) (0.197) (0.183) (0.446)
Clarity of informal hierarchy (H1) 0.124* 0.145* ⫺0.048 0.805** 0.081 ⫺0.008
(0.063) (0.067) (0.088) (0.209) (0.058) (0.098)
Clarity of informal hierarchy ⫻ CEO has highest rank (H2) ⫺0.137
(0.147)
Clarity of informal hierarchy ⫻ medium-ranking board (H3) 0.294**
(0.106)
Clarity of informal hierarchy ⫻ board size (H4) ⫺0.083**
(0.024)
Clarity of informal hierarchy ⫻ past firm performance (H5) ⫺8.720**
(0.344)
Clarity of informal hierarchy ⫻ environmental dynamism (H6) 3.867*
(2.235)
␹2
286.8 293.25 294.62 303.85 305.84 858.25 295.39
Model comparison ⌬␹2 a
6.45 1.37 10.6 12.59 565 2.14

a
For model 2, the comparison is model 1. Model 2 is the comparison for all other models.
†
p ⬍ .10
* p ⬍ .05
** p ⬍ .01

One-tailed tests for hypothesized variables and two-tailed tests for control variables.

itive sign. Moreover, a significant increase in chi- 4 was based on splitting the sample into two
square indicated a significant improvement in groups, the middle-ranking boards and the others.
model fit compared to model 2. Therefore, Hypoth- To check the robustness of the result in model 4, we
esis 3 was supported. Note that the testing in model also split the sample into three groups of low-,
2011 He and Huang
middle-, and high-ranking boards and created two
dummy variables with low-ranking boards as the
reference group. The estimated coefficient for the
interaction between the clarity of the informal hi-
erarchy and a middle-ranking board was still sta-
tistically significant (p ⬍ .05) with a positive sign,
indicating that the positive effect of the informal
hierarchy was stronger in middle-ranking boards
than in low-ranking boards. By contrast, the esti-
mated coefficient of the interaction between the
informal hierarchy and a high-ranking board
was not statistically significant. These patterns fur-
ther supported Hypothesis 3.
Model 5 tested Hypothesis 4, which predicts that
the positive effect of the clarity of the informal
hierarchy is likely to be stronger in smaller boards.
The estimated coefficient for the interaction be-
tween the clarity of the informal hierarchy and
board size was statistically significant (p ⱕ .01)
with the anticipated negative sign. Moreover, a sig-
nificant increase in chi-square indicated a signifi-
cant improvement in model fit compared to model
2. Therefore, Hypothesis 4 was supported.
Models 6 and 7 examined the moderating effect
of two contingencies external to a board, past
firm performance and environmental dynamism.
Model 6 tested Hypothesis 5’s prediction that the
positive effect of the clarity of a board’s informal
hierarchy is stronger when a firm has been per-
forming poorly. The estimated coefficient of the
interaction between the clarity of the informal
hierarchy and past firm performance was statis-
tically significant (p ⬍ .01) with the anticipated
negative sign. Thus, Hypothesis 5 was strongly
supported. Hypothesis 6 anticipates that the pos-
itive effect of the informal hierarchy will be
stronger in more dynamic industry environ-
ments. Model 7 supports this prediction, as the
estimated coefficient of the interaction between
informal hierarchy and environmental dynamism
had the predicted positive sign and was statisti-
cally significant (p ⬍ .05).
DISCUSSION AND CONCLUSIONS
This study was designed to refine understanding
of the influence of corporate boards on firm finan-
cial performance. It tested the proposition that an
informal hierarchy delineating a deference order in
a firm’s board of directors functions to coordinate
and enhance the productivity of the board’s inter-
actions, thus promoting better financial perfor-
mance for the firm. Using inequality in directors’
board memberships as our proxy for the clarity of
this informal hierarchy, our empirical analyses
support this proposition. In particular, the results
1133
show that (at least among manufacturing firms) in-
equality in directors’ board memberships is posi-
tively related to a firm’s ROA. Further, the clarity of
the informal hierarchy has a stronger positive effect
on ROA when the directors on a board are mostly of
middle rather than low or high rank, when the firm
has a smaller board, when the past performance of
the firm has been poorer, and when the industry is
more dynamic. These findings have some impor-
tant implications for both academic research and
governance practices.
First, in terms of corporate governance research,
these findings shed new light on how boards may
contribute to firm financial performance. Questions
about the performance effects of board composition
have led some researchers to conclude that previ-
ous studies of boards and firm financial perfor-
mance have probably overemphasized the formal
structural attributes of boards designed mainly to
deal with agency issues at the top of corporations
(Dalton et al., 2007; Zahra & Pearce, 1989). Such a
focus overlooks the facts that boards are human
groups and that the effectiveness and efficiency of
group interactions is critical for boards’ contribu-
tions to their firms (Charan, 1998; Finkelstein &
Mooney, 2003; Forbes & Milliken, 1999; Garratt,
1996; Huse, 2007; Johnson, 2004). As an attempt to
systematically explore the informal aspects of
board functioning using large-scale, archival data,
this study has confirmed the value and promise of
studying board processes and the factors that affect
them. This study thus constitutes a direct response
to Daily and colleagues’ (2003) call for new ap-
proaches to studying how boards influence firm
financial performance.
The results also enrich (by inference) under-
standing of what affects board processes. Pettigrew
(1992) suggested that studies of boards have paid
insufficient attention to what actually goes on in
boardrooms. As noted above, this is partly because
of the dominance of agency theory in corporate
governance research (Daily et al., 2003), so that
board interactions are often viewed as those be-
tween the CEO and the other directors rather than
those among them as a group. This study took as its
premise that boards are groups and that, as with
other human groups, informal structures emerging
among the member-directors may influence their
interactions (Forbes & Milliken, 1999; Huse, 2007).
Indeed, the findings tentatively confirm that the
informal hierarchy of a board (represented here by
the inequality of directors’ board memberships) has
significant implications for the board’s effective-
ness by providing social cues for how directors
interact. This has been the first large-scale study of
which we are aware to examine how informal hi-
1134 Academy of Management Journal
erarchies affect directors’ contributions to firm per-
formance. We hope it can be a stepping stone for
future studies designed to systematically explore
the underlying social mechanisms that guide
boardroom interactions.
In addition, this study suggests a complemen-
tary approach to examining agency issues in cor-
porate governance. Previous studies of boards
and firm financial performance have been criti-
cized for their overreliance on agency theory, and
they have in fact generated inconsistent empiri-
cal findings (Daily et al., 2003; Dalton et al.,
2007). Although various explanations of the in-
consistent findings can be proposed (Johnson et
al., 1996), this study provides an alternative way
of assessing the value of agency theory in gover-
nance research. Specifically, we tried to explore
whether occupying the top position in the infor-
mal hierarchy provides a CEO with leverage to
act opportunistically. Although our analysis
(model 3 in Table 2) was not conclusive owing to
data limitations, we believe this question de-
serves continued research attention when larger-
scale data are available.
Second, we set out to extend group dynamics
research to a different setting, boards of directors,
and the findings confirm the fruitfulness of such
extension in several respects. Although it has long
been noted that informal hierarchies can coordi-
nate interactions and reduce conflict in groups, this
idea has mainly been treated conceptually and re-
ceived scant systematic investigation (see Magee &
Galinsky, 2008). Of those studies with empirical
evidence on this phenomenon, Whyte (1943) pro-
vided a case-based enthnolographical account,
Gould (2003) examined the effect of rank orders on
conflicts at the dyadic level, and Groysberg and
colleagues (2009) focused on the effect of “stars” on
group effectiveness. This study supplements these
studies by subjecting this notion to rigorous large-
scale empirical examination and identifying its key
boundary conditions. Furthermore, studies of in-
formal hierarchies in groups, especially those of
status characteristics (e.g., Ridgeway et al., 1994),
often depict status differentiation as categorical dif-
ferences based on demographic characteristics.
Such an approach risks overlooking the fine-
grained differentiation in rank among group mem-
bers and, as a result, pays scant attention to Blau’s
(1977) conceptualization of status inequality as an
important structural condition at the group level.
As far as we know, this study is one of very few to
have explicitly modeled this group-level structural
condition. In addition, most studies of informal
hierarchies in groups have been conducted in lab-
oratory settings (Magee & Galinksy, 2008). Going
December
from laboratory settings to real work groups can
help scholars develop a better understanding of
how informal hierarchies affect group effectiveness
by taking into account conditions both inside and
outside groups, as shown in this study.
Third, our findings have implications for gov-
ernance practices. The findings that its informal
hierarchy shapes interactions on a board and that
the financial performance of the focal firm re-
flects such influence suggest a potential avenue
for improving corporate governance. Recent cor-
porate governance reform has focused almost ex-
clusively on designing boards in ways that will
keep directors independent of management
(Westphal & Bednar, 2005), but the impact of
such initiatives has been limited at best (Dalton
et al., 2007). Our findings suggest that board re-
form should emphasize alternative ways of im-
proving the effectiveness of boardroom interac-
tions (see also Finkelstein & Mooney, 2003). One
way to achieve improvement might involve rec-
ognizing and nurturing an informal hierarchy
among directors. To do so, a board does not al-
ways have to go after highly regarded directors,
which may be difficult and costly, because the
hierarchical differentiation among directors is
defined relatively. Like Groysberg and col-
leagues’ (2009) findings, the results of this study
suggest that having an “all-star” board may not be
conducive to effective board interactions. Identi-
fying how informal hierarchies form and select-
ing directors accordingly may constitute an addi-
tional measure to improve the functioning of
corporate boards.
Despite its potential contributions, this study has
some limitations that call for care in interpreting its
empirical findings and suggest directions for future
research. First, we were unable to collect system-
atic and complete data about the diversity of direc-
tors’ education levels, industry experience, func-
tional backgrounds, or public service records and
thus were unable to control for the effects of such
variables in our models. Yet informal hierarchies in
corporate boards may sometimes be based on these
variables, though we feel that failing to include
them did not seriously bias the results of this study.
Take directors’ functional background as an exam-
ple. If directors on a board draw heavily on func-
tional background in conferring deference, we
should not observe any effect of board membership
inequality, regardless of whether functional back-
ground is controlled for. Or the effect of board
membership inequality and functional background
may be confounded if background mainly deter-
mines directorship. Yet such a possibility would in
fact provide additional validation for our proxy
2011 He and Huang
measure of informal hierarchy based on board
membership, as functional expertise simply consti-
tutes an antecedent of board membership. Nonethe-
less, considering these additional variables opens a
promising avenue for research. That is, informal
hierarchies may be based on different dimensions,
so multiple hierarchies may exist among directors.
Future studies may fruitfully examine how multi-
ple informal hierarchies are likely to respectively
or interactively affect different decisions of boards.
Generally speaking, we believe future research in
this area would benefit enormously if comprehen-
sive and direct measures of board informal hierar-
chy could be developed and validated.
Second, we have proposed that the logical link
between a board’s informal hierarchy and its firm’s
financial performance is the effectiveness of the
board’s interactions. Ideally, a better way of captur-
ing the effectiveness of board interactions would be
to analyze the content and quality of actual board
decisions. Like previous researchers examining the
performance effects of corporate boards (see Dalton
et al. [2007] for a recent review), we were unable to
do this. Our analytical strategy relied instead on
logical inference to develop a set of closely linked
corollary hypotheses that triangulate the suggested
causal mechanism and eliminate possible alterna-
tive explanations (Lave & March, 1993; Merton,
1968). Future studies may adopt creative ap-
proaches to overcome the difficulties in directly
measuring the effectiveness of board interactions
and testing its mediating effects. Therefore, we
hope readers are cautious in interpreting our em-
pirical findings related to firm financial perfor-
mance as measured by ROA. We also believe that
board research could advance quickly if large-scale
data on actual board decisions and processes were
available.
On a related point, in this study we highlighted
the importance of the informal hierarchy in guiding
directors’ interactions, especially in addressing ac-
tual and potential challenges to building consensus
among directors. However, other mechanisms can
also help a board build consensus. They may in-
clude, for example, ingratiation (Westphal & Stern,
2007) and group composition (e.g., as influenced by
recruiting directors with similar beliefs). With our
limited data, we were unable to test these alterna-
tive mechanisms, but to the extent that they also
promote consensus building, they should essen-
tially condition rather than negate the effect of in-
formal hierarchy. Still, examining such mecha-
nisms might enhance understanding of how a
board’s informal hierarchy affects boardroom inter-
actions. Future studies might examine how differ-
ent consensus-building mechanisms affect board-
1135
room interactions and whether these mechanisms
complement or substitute for each other.9
Third, we were unable to explore in-depth vari-
ous possible downsides of a board’s informal hier-
archy. Although it seems self-evident that efficient
coordination is much needed in a corporate board
(Forbes & Milliken, 1999; Huse, 2007), we do rec-
ognize the possibility that a board’s informal hier-
archy may not always benefit its firm, as the effec-
tiveness of a hierarchy depends on internal and
external contingencies. For example, we predicted
that when a firm’s CEO also occupies the top posi-
tion in the informal hierarchy, agency problems
might become severe, thus weakening the benefits
of the informal hierarchy. Future research might
focus on how the informal hierarchy can bias group
decision making or introduce destructive conflict
into a board’s deliberations.
Finally, given our focus on informal social struc-
tures, we included board independence and lead-
ership structure only as statistical controls. More-
over, our data provided natural control for board
committees, because variance in the presence of the
three major types of committees was absent. Thus,
we did not examine how the interplay between
formal and informal structures influences the dy-
namics and outcomes of boardroom interactions.
But this could be a promising research avenue be-
cause formal and informal structures coexist in co-
ordinating directors’ interactions. Future studies
might examine whether formal and informal struc-
tures substitute for or complement each other. For
example, it would be interesting to investigate
whether establishing a greater number of board
committees reduces or enhances the effects of a
board’s informal hierarchy.
To summarize, this study looked into a simple
yet fundamental fact about corporate boards—
they are groups of individuals compelled to in-
teract, to discuss, and to make strategic decisions.
The results demonstrate a relationship between
firm financial performance and a seemingly un-
important proxy variable—the inequality of di-
rectors’ board memberships. Yet, to the extent
that this variable captures the deference order
among directors, the approach has been rather
fruitful in showing that directors seem to be at-
tentive to the informal hierarchical order among
themselves and that such attention affects their
effectiveness in playing their strategic roles. The
results offer further insights by showing that cer-
tain contingencies can modify the influence of
9
We thank an anonymous reviewer for this
suggestion.
1136 Academy of Management Journal
this informal hierarchical order. We hope this
study can stimulate more research aimed at un-
derstanding how social interactions affect board
processes and firm performance. After all, boards
are groups of human individuals who are subject
to the influence of social order and norms.
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2011 He and Huang
Jinyu He (mnjhe@ust.hk) is an assistant professor of stra-
tegic management in the Department of Management at
the Hong Kong University of Science and Technology. He
received his Ph.D. from the University of Illinois at Ur-
bana-Champaign. His current research interests focus on
corporate governance, competitive dynamics, and their
interrelationship.
Zhi Huang (huangzb@ust.hk) is an assistant professor in the
Department of Management at the Hong Kong University of
1139
Science and Technology. He received his doctoral degree in
organization studies from Boston College. His primary areas
of interests are organizational theory and organizational
sociology. Particular issues of investigation include status
stratification in market contexts, relational networks and
identity, the emergence and evolution of organizational
fields, markets, and industries. He has been examining
these issues in the context of U.S. collegiate sports and the
U.S. commercial banking industry.