Peer directors’ effort, firm efficiency and performance of diversified firms: An efficacy-based view of governance

Studying how boards contribute to firm performance and examining implementation costs associated with diversification strategy are domains of growing interest to strategy scholars. We integrate these incipient literatures to examine the role of Peer Independent Executive Directors’ (PIED) effort in improving the performance of diversified firms. The efficacy-based view of governance that we propose in this paper contributes to both corporate governance and diversification research by highlighting the contextual role of director domain expertise and effort in improving firm performance. Using a longitudinal sample of US firms, we show that the PIED effort is progressively beneficial for firm performance with successive increases in diversification levels, irrespective of diversification type. In case of diversified firms, PIED effort helps a firm better manage internal dynamics and opportunism among various business segments within a firm to benefit from complex diversification strategies.