Corporate Cultures and Fabricated Boards: Should Board Structure Be Regulated?

Abstract

This study examines the effects of different corporate cultures on the efficacy of board independence as a corporate governance mechanism. We distinguish between two cultural types, manipulative versus non-manipulative firms, and focus on CEO dismissal events. In our empirical analysis, firms that are sued for financial misreporting are considered to have manipulative cultures and those that are not sued are considered to have non-manipulative cultures. Our findings show that the semblance of board independence in manipulative firms is unrelated to the likelihood or the promptness of CEO dismissal following the discovery of corporate wrongdoings. Banks and blockholders, on the other hand, both increase the likelihood and promptness of CEO dismissal. In underperforming non-manipulative firms, the presence of blockholders and bank borrowing has no effect on CEO turnover, but more independent boards increase the likelihood of CEO turnover. Corporate culture appears to be an important element in shaping the roles of governance mechanisms. Overall, these findings suggest that attempts to mandate effective corporate oversight by regulating the fraction of independent directors, crudely defined, on the board are unlikely to be successful in achieving their policy objectives.