Should Independent Board Members with Social Ties to Management Disqualify Themselves from Serving on the Board?

This paper examines whether independent directors who have social ties to management (inside directors) can effectively perform their fiduciary duty to monitor management on behalf of shareholders. Ex ante, it is not clear whether social ties will enhance or obstruct the quality of board performance. Theory suggests that directors who are socially tied to management are ineffective and would make decisions favoring management. However, social ties can increase trust and information sharing between management and independent directors, improving directors’ ability and effectiveness in governing the company (Westphal, J.D.: 1999, The Academy of Management Journal 42(1), 7–24). To examine these contradicting predictions I use social network analysis and construct proxies for social ties between management and independent board members. Using these proxies, I first demonstrate that social ties are associated with higher managerial compensation. Further analyses reveal that these results are driven by social ties that include members of the compensation committee. Conversely, I demonstrate that financial reporting quality is improved when social ties exist. Specifically, I find that the likelihood of material weaknesses in internal controls and the likelihood of financial restatements are lower in companies with social ties. I further observe that this improved quality of financial reporting holds only when social ties include members of the audit committee. I conclude that ethically, socially tied independent directors should disqualify themselves from serving on compensation committees where social independence is essential. However, in tasks where collaboration with management is essential, directors with social links to each other can be of added value to shareholders.     

Does Industry Regulation Matter? New Evidence on Audit Committees and Earnings Management

This paper investigates the moderating role of industry regulation on the effectiveness of audit committees in restricting earnings management. Using comprehensive panel data of S&P 1500 firms between 2003 and 2007, we find that the proportion of CEO directors on an audit committee is positively associated with earnings management in unregulated industries, while this association is significantly weaker in regulated industries. Further, the proportion of financial experts on an audit committee is negatively associated with earnings management. Our results also indicate that the average board tenure of audit committee members is negatively related to earnings management in regulated industries, but positively affects earnings management in unregulated industries. Finally, audit committee members’ average directorship increases earnings management in regulated industries, but reduces earnings management in unregulated industries. Overall, our results suggest that the effectiveness of audit committees in reducing earnings management and improving financial reporting quality is influenced by industry regulation.     

Board Committee Meetings and Firm Financial Performance: An Investigation of Australian Companies

This article examines how the frequency of board committee meetings impacts on Australian firms' financial performance. Data were collected from 118 Australian listed companies – including 26 financial firms and 92 nonfinancial firms – for the period 1999–2007. Analysis of that data shows that the frequencies of audit committee meetings and remuneration committee meetings are positively and significantly associated with return on equity and return on assets. The frequencies of risk committee meetings do not show any significant effects on the financial performance of Australian firms. Estimated results are found to be robust after controlling for internal as well as external governance mechanisms that might affect Australian firm performance.     

Management Attempts to Avoid Accounting Disclosure Oversight: The Effects of Trust and Knowledge on Corporate Directors’ Governance Ability

Management has the opportunity to promote self-serving accounting practices, such as earnings management, when management can effectively avoid oversight by the audit committee. This article investigates the effects of financial knowledge and dispositional trust on the ability of audit committee members to recognize management attempts to avoid full disclosure to the board and potentially deceive board members. The results of a controlled laboratory experiment with 40 experienced audit committee member participants indicate that: (1) Audit committee members with less financial knowledge are more likely to accept insufficient client explanations for accounting judgments than are more knowledgeable audit committee members; (2) Audit committee members with less financial knowledge are more likely to reject sufficient client explanations for accounting judgments than are more knowledgeable audit committee members; and (3) Audit committee members that place higher levels of trust in others are more likely to accept insufficient client explanations for accounting judgments than are less trusting committee members.     

CEO retirement compensation: Is inside debt excess compensation or a risk management tool?

CEOs face constant scrutiny over their compensation packages. This scrutiny has only intensified amid discussions of CEO-to-employee pay ratios and income inequality nationwide. CEO retirement packages are criticized as camouflage compensation used to award excessive compensation to CEOs and were, prior to 2006, less transparent than they are now. Thanks to the transparent disclosures now required by the SEC, we have a better understanding of the types and amounts of compensation owed to CEOs after they depart or retire, termed inside debt. I investigate whether all CEO inside debt components share similar incentive effects and offers some thoughts on how companies might structure these packages to be most effective. I discuss the structure and incentive effects of the two primary components of inside debt: deferred compensation and supplemental executive retirement plans (SERPs). I explain why inside debt, particularly CEO SERPs, may actually help companies manage firm risk. Finally, I outline the best ways to structure inside debt so that it functions as a resource to manage firm risk and foster a long-term perspective rather than mirroring the incentive effect of equity, increasing risk, and encouraging a myopic focus.     

Independence in Corporate Governance: the Audit Committee Role

The Code of Best Practice produced by the Cadbury Committee on the Financial Aspects of Corporate Governance (Cadbury Committee 1992) may be viewed as an ethical code in that it prescribes standards of board behaviour. The Code's specific recommendations with regard to audit committees appear to offer a practical mechanism for the promotion of ethical behaviour through the inhibition of potentially unethical influences exerted by executive directors over external auditors. The rationale for these recommendations centres on the independence of audit committee members, implying that independence is a prerequisite for ethical behaviour. This paper questions the assumptions regarding the role of independence through an exploration of conceptions of independence held by individuals involved in the activities of audit committees in major UK public limited companies. It suggests that audit committees may have an unarticulated role in providing an arena for the display of independence by the participants. This display forms a part of the ceremonial performance which builds confidence in corporate governance mechanisms.     

审计委员会、盈余质量与意见购买——来自2002-2008年中国上市公司的经验证据

本文主要探讨审计委员会治理、盈余质量对上市公司年报审计意见类型以及不利审计意见改善和审计意见恶化的影响,考察审计委员会对公司管理层审计意见购买行为的治理作用。研究表明,设立审计委员会的上市公司年报被出具非标准审计意见的可能性更低;在结合考虑盈余质量之后发现,审计委员会拥有双重的治理作用,在董事会中设立审计委员会并切实提高审计委员会的独立性和勤勉程度,不仅有助于提升上市公司财务报告的质量,而且亦有助于对卷入盈余管理的管理层的审计意见购买行为进行较为有效的制衡。     

The Link Between Small Business Governance and Performance: The Case of the Ghanaian SME Sector

ABSTRACT

The present study set out to examine corporate governance practices of SMEs in Ghana and whether there is any linkage between these governance practices and financial performance. We employed two levels of interaction to achieve our objectives: The first is an interview for a general understanding of governance issues in the SME sector and the subsequent design of a questionnaire for an exploration of the linkages between governance issues and firm financial performance by employing a linear model. The study reveals that governance structures in SMEs are jointly influenced by credit providers and business ethical considerations. The regression results show that board size, size of audit committees, corporate ethics and the proportion of outsiders on the audit committees have negative impact on financial performance while independence of the board and the presence of audit committees enhance firms' financial performance. The findings have some policy implications in that it shows that exporting SMEs are relatively profitable. It is recommended that in an attempt to promote exports, the legal and regulatory environment should be conducive for these firms.     

我国上市公司审计委员会有效性研究——基于上市公司年报补丁的实证分析

当前,国内外监管政策日益重视审计委员会在保障财务报告质量中的作用。事实上,审计委员会是否已提高财务报告的质量,是一个实证检验的问题。本文的研究结果表明,设立审计委员会的上市公司发布年报补丁的概率比较低,与此同时,随着审计委员会独立性的增强、权威性的提高、主任委员独立性的增加,公司发布年报补丁的概率进一步降低。这些研究结果说明,当前我国上市公司已设立的审计委员会能有效地发挥提高财务报告质量的作用。     

The role of the audit committee in enhancing the credibility of CSR disclosure: Evidence from STOXX Europe 600 members

This study examines the influence of audit committee attributes, namely financial expertise, independence, meeting frequency and size, on the adoption of CSR assurance. The study also offers insight into the effect of audit committee attributes on the scope and level of CSR assurance and the selection of CSR assurance providers. Contextually, this is achieved using a sample of European companies listed on the STOXX 600 index over the period 2012–2018. The findings show that attributes related to audit committee financial expertise, audit committee independence and audit committee meeting frequency and the existence of a CSR committee, are positively linked with the adoption of CSR assurance. Moreover, our empirical analysis further highlights the critical role of audit committee financial expert members in enhancing the scope and level of CSR assurance. Furthermore, audit committee with more frequent meetings lead to higher assurance scopes. Our findings offer significant and multidimensional insights for regulators, policymakers and professionals, regarding the revision and establishment of regulations concerning the audit committee structure.     

Female directors,board committees,and firm performance: Time-series evidence from Turkey

We study the relationship between female representation on boards and firm value and profitability in Turkey from 2011 to 2018, relying on hand-collected data covering the vast majority of listed firms. We build several proxies of female representation on boards and find no evidence that female directors predict firm value and profitability using broad measures that are typically required or mandated by regulators. However, we find that female directors predict higher firm value when they have a more active role in board governance through board committee memberships and when they are represented in these committees in relatively large numbers. The presence of female directors, who are members of controlling families is associated with higher firm value. The presence of female independent directors is associated with higher profitability. We also study three potential channels through which female directors might influence firm outcomes and find that the presence of female directors on boards and board committees (i) facilitates the production of financial statements of higher quality; (ii) may lead to lesser incidence of violations of capital market laws and regulations, and (iii) reduces the hoarding of negative news and the related stock price crash risk. We also compare female directors to their male counterparts and find limited evidence for systematic differences.     

Corporate Governance Reforms: Redefined Expectations of Audit Committee Responsibilities and Effectiveness

Comprehensive regulatory changes brought on by recent corporate governance reforms have broadly redefined and re-emphasized the roles and responsibilities of all the participants in a public company’s financial reporting process. Most notably, these reforms have intensified scrutiny of corporate audit committees, whose role as protectors of investors’ interests now attracts substantially higher visibility and expectations. As a result, audit committees face the formidable challenge of effectively overseeing the company’s financial reporting process in a dramatically changed – and highly charged – corporate governance environment. This paper discusses the new expectations of audit committee responsibilities and effectiveness in the wake of corporate governance reforms, key challenges, “whistleblower” provisions and shortcomings, and provides some directions for future research.     

Do founders matter? A study of executive compensation,governance structure and firm performance

This study compares founder-CEOs and professional CEOs in newly public firms in terms of executive compensation, governance structure, and firm performance. The paper applies a series of decomposition methods to separate founders' extrinsic characteristics from their intrinsic endowments. The paper finds that founder CEOs tend to earn smaller incentive compensation and smaller total compensation than professional CEOs. Founder-managed firms are associated with higher financial performance and are more likely to survive than professional managed firms. Firms with founder-CEOs are associated with even higher financial performance when the position of CEO and chairperson of the board is combined.     

公司治理及其对审计影响

近年来，公司治理对于保证财务报告的公正合理、阻止公司舞弊发生的作用得到了广泛的认可和重视。本文阐述了公司治理模式中各因素对审计过程的影响，其中，公司管理层作为公司治理模式确立者对于审计过程具首要影响。     

Women on Corporate Boards of Directors: A Needed Resource

This research reports the results of a study of women serving on boards of directors of Canadian private and public sector organizations. These women (N = 278) were an impressive and talented group (eduction, professional designations). In addition, they brought a variety of backgrounds and expertise to their director responsibilities. Most were nominated as a result of recommendations from current board members, CEOs, or someone who knew board members or CEOs. Thus personal relationships (the old boy's network) as well as track records and appropriate expertise were important factors in board nominations. Women directors thought they had some influence on women's issues with their boards and board companies. A majority believed that board members should be more diverse, including more women and fewer male CEOs. However they indicated several barriers faced by women in being selected and nominated for board appointments.     

审计委员会、董事会特征与财务呈报质量:基于中国证券市场的实证研究

Board independence and the board’s expertise characteristics are key factors influencing the quality of financial reporting. Companies, having a higher percentage of independent directors, having independent financial directors, or having an audit committee on board are more likely to generate quality accounting earnings information. Variables representing board behavior characteristics, namely, ratio of shares owned by the board, board meeting frequency within a year, and the number of independent directors holding posts concurrently in the controlling shareholder’s company, are not significantly related to the quality of financial reporting. Board meeting frequency is even abnormally negatively related to the quality of financial reporting. Translated from Guangli Pinglun 管理评论 (Business Review), 2006, (7): 49–56     

The Sarbanes-Oxley Act Will Change the Governance of Non Profit Organizations

As a public director of a NASDAQ stock exchange listed public corporation, I have seen how quickly the reforms in corporate governance imposed by the Sarbanes-Oxley Act have changed procedures and policies in public corporations. In areas such as transparency of financial records and other financial matters including compensation of top executives and conflict of interest policies affecting both corporate boards of directors and employees of the corporation the reforms of this new federal law have quickly changed corporate practices in many corporations. Many persons who have studied this new law believe that these changes will benefit the public, shareholders, employees, and other stakeholders in the modern corporation by increasing the reputation of these organizations for integrity and transparency. Stock exchanges such as NASDAQ and the New York Stock Exchange now require all listed companies to have (after a transition time) a majority of independent directors on their boards of directors. Only independent directors may serve on the audit, nominating and compensation committees of boards in most cases. Some exceptions are made to these rules for foreign and domestic issues of companies where a majority of the voting power is held by one person. According to Morrison & Foster LLP, Corporate Board Advisory March , 2004, NASDAQ requires that the board of directors of a listed company determine that an independent director does not have a relationship that would “interfere with the exercise of independent judgment” in carrying out the responsibilities of a director. Donald Grunewald served as President of Mercy College from 1972 to 1984. He has served as a member of the board of trustees of several colleges and proprietary educational institutions and on the boards of other charitable institutions. Currently he is a member of the Board of Directors of EVCI Career Colleges, Inc., a NASDAQ listed corporation.     

Board Characteristics,Compliance, and Firm Performance: Empirical Findings from Colombia

Using data from a single database of Colombian firms, we confirmed an endogenous relationship between specific board characteristics, compliance with corporate governance guidelines, and firm performance. A board comprising experts without conflicts of interest is more likely to control ethical behavior, implement audit committees, review compliance with accepted accounting standards, and approve and control the firm’s strategic planning, all of which will lead to an improvement in firm results, and engagement and retention of higher quality board members. Conclusions have strong implications for public policy and managerial practice.     

Dollars and sense: The implications of CEO compensation for organizational performance

Crafting a compensation package for an organization's chief executive officer (CEO) that will help the firm maximize its performance is a vexing challenge for a board of directors. Management theory offers boards several practical hints. A board can put its CEO and the firm in the best position to be successful by (1) creating strong incentives for the CEO to act in the firm's best interest at all times; (2) benchmarking a CEO's performance and compensation relative to that of very high performing CEOs in the industry; (3) diagnosing and responding to CEOs’ feelings about equity relative to their peers; (4) paying a CEO with uniquely valuable knowledge, skills, and ability at the top of the market; (5) offering retention incentives if a proven performer with unique skills is leading a company; (6) resisting the temptation to simply mimic the compensation packages that work for leading firms; and (7) considering candidates’ social ties when recruiting a new CEO.     

The role of CSR committee characteristics on R&D investments

We investigate the impact of corporate social responsibility (CSR) committees on research and development (R&D) investments. Using a unique sample of European listed companies, we offer three key results to the current academic and policy debate. First, we document that firms with a CSR committee exhibit lower levels of R&D investments. Second, we find that the CSR committee membership of either the CEO or chairman is associated with an increase in R&D investments. Finally, we provide evidence that firms whose CSR committees are chaired by a female director exhibit higher R&D investments. These results are of importance for academics, investors, and policy makers, since they shed light on the effect of CSR board committees on corporate outcomes, beyond their impact on social performance and/or sustainability disclosure.