When Stakeholder Representation Leads to Faultlines. A Study of Board Service Performance in Social Enterprises

• Author: Mirjam Knockaert,Saskia Crucke
• Date: 01 July 2016
• Published date: 01 July 2016
• DOI: http://doi.org/10.1111/joms.12197

When Stakeholder Representation Leads to Faultlines.

A Study of Board Service Performance in Social

Enterprises

Saskia Crucke and Mirjam Knockaert

Ghent University; University of Oslo

ABSTRACT Following the growing interest in sustainability and ethics, organizations are

increasingly attentive to accountability toward stakeholders. Stakeholder representation,

obtained by appointing board members representing different stakeholder groups, is suggested

to be a good ethical practice. However, such representation may also have nefarious

implications for board functioning. Particularly, it may result in strong faultline emergence,

subsequently mitigating board performance. Our study aims at understanding the process

through which faultlines affect board performance, and particularly the board service role

through which the board is involved in providing counsel and strategic decision-making. We

study the relationship between faultlines and board service performance in the particularly

relevant context of social enterprises. We find that faultline strength is negatively related to

board service performance and that this relationship is mediated by board task conflict.

Furthermore, our study reveals the importance of clear and shared organizational goals in

attenuating the negative effects of faultlines.

Keywords: board service performance, faultlines, governance, stakeholder representation,

social enterprises

INTRODUCTION

Corporate citizenship, sustainability and ethics in organizational contexts are increas-

ingly receiving notice (Aguinis and Glavas, 2012), thus bringing increased attention to

accountability toward different stakeholders and the social responsibility of organiza-

tions (Carroll, 2015), as well as giving rise to an active discussion about stakeholder

democracy (Matten and Crane, 2005; Van Buren, 2010). Stakeholder democracy refers

to ‘stakeholder participation in processes of organizing, decision-making, and gover-

nance in corporations’ (Matten and Crane, 2005, p. 6). It is considered a best ethical

Address for reprints: Saskia Crucke, Ghent University, Faculty of Economics and Business Administration,

Tweekerkenstraat 2, 9000 Ghent, Belgium (Saskia.Crucke@UGent.be).

V

C2016 John Wiley & Sons Ltd and Society for the Advancement of Management Studies

Journal of Management Studies 53:5 July 2016

doi: 10.1111/joms.12197

practice or even an ethical obligation (Hendry, 2001; Moriarty, 2014; O’Dwyer, 2005):

Van Buren (2010) argues that, as stakeholders contribute to the value creation of organi-

zations, they should also have the right to participate in the decision-making and corpo-

rate governance processes. Through stakeholder participation, stakeholders are not just

considered as a means, but are also an end, in and of themselves (Evan and Freeman,

1993; Hielscher et al., 2014). As taking into consideration stakeholder demands is con-

sidered crucial for organizational health (Moriarty, 2014), stakeholder participation is

expected to ultimately benefit both society and organizations (Harrison and Freeman,

2004).

However, despite the centrality of stakeholder democracy in ethical discussions, the

literature devotes considerable attention to the participation of only one particular

stakeholder group, namely employees (Harrison and Freeman, 2004; Matten and

Crane, 2005; Moriarty, 2010), referred to as workplace democracy (Matten and Crane,

2005; Timming, 2015). Notwithstanding this empirical emphasis on the employees as

stakeholders, the board of directors, as the ultimate decision-making body in organiza-

tions, is considered to play a crucial role in effectuating stakeholder participation (Mor-

iarty, 2010; Van Buren, 2010). Indeed, it is commonly accepted that one of the best

ways to provide a diverse range of stakeholders with greater voice is through appoint-

ments to the board of directors (Harrison and Freeman, 2004; Moriarty, 2014).

Researchers allude to the potentially positive aspects of stakeholder democracy through

board appointments (hereafter: stakeholder representation). Specifically, it is considered

a best practice from an ethical perspective as it enables the organization to share power

with all stakeholders (Moriarty, 2014; Van Buren, 2010). Furthermore, stakeholder rep-

resentation may often help in gaining legitimacy from different stakeholder groups,

which is crucial for the acquisition of resources, including financial and human resources

(Doherty et al., 2014; Miller et al., 2012). By contrast, other researchers allude to the

potentially nefarious effects of stakeholder representation on the board, which is related

to slower decision-making and the lack of knowledge of stakeholder representatives

(Harrison and Freeman, 2004; Hielscher et al., 2014; Matten and Crane, 2005). Conse-

quently, it is likely for stakeholder representation to affect board functioning. Boards

typically engage in two different roles, referred to as the control role (Okhmatovskiy and

David, 2012) and the service role (Fiegener, 2005; Forbes and Milliken, 1999; Zahra

and Pearce, 1989). It is through the service role that the board is involved in enhancing

the firm’s reputation, establishing contacts with the external environment, as well as giv-

ing counsel and advice to executives (Minichilli et al., 2009; Zahra and Pearce, 1989).

As such, it is likely for stakeholder representation to particularly affect the engagement

of the board in its service role. Surprisingly, however, there is a dearth of research into

the implications of stakeholder representation on boards of directors in general and, spe-

cifically, the board’s service role.

Our study focuses on understanding the link between stakeholder representation and

the engagement of the board in its service role (hereafter referred to as ‘board service

performance’; similar terms used in the literature include ‘board service task perform-

ance’ (Minichilli et al., 2009), ‘board engagement in the service role’ (Knockaert and

Ucbasaran, 2013), and ‘board service involvement’ (Knockaert et al., 2015). In doing

so, we focus on a relevant organizational behaviour concept and related theories,

769Faultlines and Board Service Performance

V

C2016 John Wiley & Sons Ltd and Society for the Advancement of Management Studies