We examine whether management faultlines (i.e., dissimilar groupings among executives) are related to management forecast processes and outcomes. Management faultlines are formed based on the simultaneous alignment of senior executives' demographic characteristics (e.g., an MBA background, elite school education, gender, board experience, age, or tenure). We argue that management faultlines impede information sharing, create conflicts, and divert managerial attention away from common‐goal tasks. We hypothesize and find that management faultlines are associated with lower management forecast quality. Furthermore, the faultline effect is more pronounced when forecasting difficulty is high. In contrast, the faultline effect is mitigated when a firm nurtures a supportive and diverse workplace. In addition, we find that management forecast propensity and frequency are negatively associated with management faultlines. Overall, our findings suggest that management faultlines compromise management forecast processes and outcomes. In particular, since faultlines can arise as a company diversifies, boards should be aware of these unintended consequences and how they can be mitigated.

Various regulatory governance initiatives have strived for board diversity, as diversity stimulates creativity, encourages discussion, and enlarges the board's knowledge base. However, increased diversity results in superior decision-making only when the board is free from conflicts and acts as a cohesive group. In this paper, we extend existing corporate governance research by introducing faultline theory to the board of directors (Lau and Murnighan 1998). The idea is to show how a board's diversity structure can give rise to the formation of subgroups along faultlines. The resulting subgroup formation may, in turn, reduce board effectiveness. Using a sample of U.S.-listed firms between 2008 and 2012, results suggest that boards with strong faultlines are associated with lower firm performance, lower CEO turnover-performance sensitivity, and higher abnormal CEO compensation. Understanding potential unintended consequences of board diversity could be of interest to regulators and companies that plan to appoint new directors to the board.

In contrast to prior research that typically focuses on the characteristics of the audit committee (AC), we investigate how intergroup differences between the AC and the rest of the board (ROB) affect monitoring effectiveness. Drawing on group literature and the similarity attraction paradigm, we hypothesize that high intergroup differences between the AC and the ROB impede communication and information sharing. Poor “fit” between the AC and the ROB can lead to an “us versus them” mentality that reduces trust and hinders knowledge exchange, diminishing monitoring effectiveness. Using a sample of listed US firms, we find that intergroup differences between the AC and the ROB in terms of their respective characteristics are linked to a lower likelihood of reporting an existing or likely material weakness, higher discretionary accruals, and a lower likelihood of a going‐concern opinion among financially distressed firms. These negative effects are most pronounced when the AC and the ROB are very different (i.e., in the upper quartile and decile of the AC‐ROB distance distribution). Additional analyses show a higher probability of a Big R restatement, a lower likelihood of a Big R restatement when a material misstatement likely exists, and a lower likelihood of goodwill impairment when one is expected. Notably, the adverse impact of AC‐ROB dissimilarity is more prominent when the AC is less powerful or lacks group stability. Regulators and companies should be aware that AC composition decisions cannot be made in isolation because large intergroup differences in director profiles between the AC and the ROB reduce monitoring effectiveness.