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

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  • Katja Rost
  • Margit Osterloh

Abstract

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 nonmanagerial background as well as women with a management-related background.

Suggested Citation

  • Katja Rost & Margit Osterloh, 2008. "You Pay a Fee for Strong Beliefs: Homogeneity as a Driver of Corporate Governance Failure," CREMA Working Paper Series 2008-28, Center for Research in Economics, Management and the Arts (CREMA).
  • Handle: RePEc:cra:wpaper:2008-28
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    Cited by:

    1. Mingzhu Wang & Elisabeth Kelan, 2013. "The Gender Quota and Female Leadership: Effects of the Norwegian Gender Quota on Board Chairs and CEOs," Journal of Business Ethics, Springer, vol. 117(3), pages 449-466, October.
    2. Talke, Katrin & Salomo, Sören & Rost, Katja, 2010. "How top management team diversity affects innovativeness and performance via the strategic choice to focus on innovation fields," Research Policy, Elsevier, vol. 39(7), pages 907-918, September.
    3. Barbara Steffens & Gregor Thüsing & Christine Bortenlänger & Jana Oehmichen & Marie-Christine Ostermann & Günter Buchholz, 2010. "Brauchen wir eine Frauenquote?," ifo Schnelldienst, ifo Institute - Leibniz Institute for Economic Research at the University of Munich, vol. 63(17), pages 03-15, September.
    4. Hans Buhl, 2010. "Is the Diversification Benefit for Teams More Sustainable Than at the Financial Market?," Business & Information Systems Engineering: The International Journal of WIRTSCHAFTSINFORMATIK, Springer;Gesellschaft für Informatik e.V. (GI), vol. 2(2), pages 61-65, April.

    More about this item

    Keywords

    Board diversity; psychological economics; forecasting predictions; gender; expert knowledge; uncertainty;

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