Boards of directors typically consist of people who are recognised as leaders by the corporate community. But just as too many chefs spoil the soup, so may too many people trying to lead at the same time fail to benefit a firm's financial performance.

Instead, boards that sort themselves into clear "informal hierarchies" can have a better impact on firms than boards where the ranking of the directors is less apparent, according to a study by Jinyu He and Zhi Huang.

Such hierarchies matter for two reasons. "First," they said, "the number of board meetings in a year is usually low and each meeting short. 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."

"Greater clarity [in the hierarchy] can help directors interact more productively, and the result would tend, other things being equal, to be reflected in better decision making and consequently better financial performance for the firm."

A measure of the informal hierarchy can be had by looking at the number of boards that a director sits on, since this is likely to reflect his or her standing in the corporate world. A director sitting on more boards would presumably have a higher informal ranking within the board than a director who sits on only one or two boards.

Clarity can be measured by the degree of inequality in the number of directorships among the board members, since this would allow room for a hierarchy to be established.

The authors tested these arguments in 530 US manufacturing firms using data from 2001 to 2007 to confirm the link between informal hierarchies and firm financial performance.

Firms that had boards with clearer informal hierarchies fared better. If they were one standard deviation above the mean of board inequality, they saw a 2.8 per cent positive change on return on assets (ROA) above firms one standard deviation below the mean. This was particularly significant given the average ROA in the sample was about two per cent.

A larger number of middle-ranked directors also strengthened the relationship between the clarity of the informal hierarchy and firm performance.

"High-ranking actors usually feel secure, while low-ranking ones often find it difficult to move up so they may become relatively disinterested in climbing the hierarchy. Middle-ranking actors, though, covet the rewards claimed by high-ranking actors and at the same time are better positioned than those in the low ranks, so they are more motivated to move up," the authors said. "They are therefore more likely to attend to and act in keeping with the informal hierarchical order."

A smaller board size also reinforced the informal hierarchy because boards tend to meet infrequently and it is easier to recall the hierarchy among fewer members.

The authors also looked at the environment that the boards were working in. A clear informal hierarchy helped more when the firm had a poor past performance and when it operated in a dynamic industry subjected to frequent and rather unpredictable change.

This was the first large-scale study to examine informal hierarchies in corporate boards and suggests that firms might improve corporate governance by recognising and nurturing an informal hierarchy among directors.

"A board does not always have to go after highly regarded directors, which may be difficult and costly, because the hierarchical differentiation among directors is defined relatively. Having an 'all-star' board may not be conducive to effective board interactions," the authors said.