Articlehybrid2021

Board design and governance failures at peer firms

Shelby L. Gai · J. Yo‐Jud Cheng · Andy Wu

18 citations0/0 files storedStrategic Management Journal

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Corporate Finance and Governance Auditing, Earnings Management, Governance Corporate Governance and Financial Management

Abstract

Abstract Research Summary Our study introduces board committees as a crucial determinant of board actions. We examine how directors who structurally link different board committees—referred to as multi‐committee directors (MCDs)—explain why some board actions are merely symbolic while others are more substantive. As a baseline, we argue that boards in general respond to financial restatements at peer firms by symbolically appointing new directors who are relatively inexperienced and unlikely to have a substantive impact. In contrast, boards with audit–nomination MCDs are more likely to take the substantive action of appointing new directors with the prior experience necessary to reduce the risk of their own future financial restatement. We combine qualitative interviews and a causal identification strategy using an original dataset covering Russell 3000 firms from 2001 to 2014. Managerial Summary Committees play a central role in how boards carry out their governance responsibilities. This study shows that assigning directors to multiple board committees can improve governance performance under certain conditions. Specifically, when external events focus attention on the board's monitoring role, the presence of multi‐committee directors (MCDs) that link the audit and nomination committees is associated with the subsequent appointment of more experienced directors and a reduction in the likelihood of future financial restatements and lawsuits. Because these specific board configurations can have substantive implications for governance effectiveness, we recommend that board leaders be deliberate in how they allocate board committee assignments and treat board committee structure as an intentional organizational design choice that can meaningfully improve governance outcomes.

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References

1983Separation of Ownership and Control 2002Audit committee, board of director characteristics, and earnings management 1984Econometric Models for Count Data with an Application to the Patents-R & D Relationship 2003Boards of Directors and Firm Performance: Integrating Agency and Resource Dependence Perspectives 2003Boards of Directors and Firm Performance: Integrating Agency and Resource Dependence Perspectives 1998Firm Performance and Board Committee Structure 2010Does governance travel around the world? Evidence from institutional investors 2003The Cross-National Diversity of Corporate Governance: Dimensions and Determinants

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