Director friendships with the CEO: are they always a threat to director integrity?

Abstract

This paper examines the effects of friendships with the CEO on the decisions of directors of non-profit organisations. Participants in the experiment are active non-profit directors. Results indicate that non-profit directors with no corporate director experience manage earnings less for the benefit of a CEO when they are friends of the CEO, relative to when they do not have a friendship with the CEO. Further, disclosure of the friendship does not result in an increased willingness to manage earnings for the benefit of a CEO friend. The results with non-profit directors are entirely opposite to those previously documented for corporate directors (Rose, J., Rose, A., Norman, C., and Mazza, C, 2014. Will disclosure of friendship ties between directors and CEOs yield perverse effects? The Accounting Review, 89 (4), 1545–1563.). Further, we find that non-profit directors who also have corporate director experience are willing to manage earnings more for a CEO who is a friend, relative to a CEO who is not a friend, and disclosure of the friendship results in increased willingness to manage earnings for the CEO.