Conflicting Objectives within the Board: Evidence from Overlapping Audit and Compensation Committee Members |
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Authors: | Udi Hoitash Rani Hoitash |
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Institution: | (1) College of Business Administration, Northeastern University, 422 Hayden Hall, 360 Huntington Avenue, Boston, MA 02115-5000, USA;(2) Department of Accountancy, Bentley College, 175 Forest Street, Waltham, MA 02452-4705, USA |
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Abstract: | The board of directors is an elite group that faces multifaceted tasks. The board needs to implement decisions on a wide variety
of subject matter. These decisions are often delegated to specialized sub-committees within the board. The different objectives
of each sub-committee can result in conflicting interests leading to decisions that are sub-optimal. For example, at times,
the objectives of the compensation and the audit committee are not aligned. The objective of compensation committees is to
grant CEOs compensation packages reflective of their performance. Yet, these compensation packages might contain incentives
that could motivate CEOs to influence the financial reporting process in order to reflect better performance, increasing the
risk of poor quality financials. In contrast, the objective of audit committees is to oversee the quality of the financial
reports and the process that leads to them. Therefore, they would favor compensation packages that reduce the risk of earnings
manipulation. We examine public companies that have overlapping compensation and audit committee members and find a higher
proportion of CEO incentive compensation in companies with less overlap among audit and compensation committee members. These
results suggest that separating the members within these committees might contribute to the effectiveness of board decisions.
Data availability: Data are publicly available from sources identified in this paper. |
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Keywords: | Audit Committee Compensation Committee Committee separation CEO compensation Financial reporting quality |
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