Ex-Military Director on the Board: A paradox for monitoring corporate misconduct

Abstract

We examine the effects of the presence of ex-military directors on a firm’s board of directors and firm corporate misconduct (e.g., health, safety, environmental, fraud, and other regulatory violations). Drawing upon agency logic and the demography-based perspective of upper echelons theory, we suggest that firms who appoint ex-military to a board position face the paradoxical situation of an independent director who is uniquely deferential to managerial authority. On one hand, a military background may impart directors with discipline, obedience, selflessness, and other values particularly suitable to ethical conduct. On the other hand, military values “follower mentality”, group solidarity, and unwavering trust in leaders. Due to this strong deference to superior’s mandates, ex-military director firms may fail to vigilantly monitor manager actions, and we expect ex-military director firms to have a greater likelihood of corporate misconduct. Further this relationship is moderated by board size that can create challenges from the dilution of individual effects, diffusion of responsibility, factions, and increased power of the CEO, resulting in greater deference given by the ex-military director firm compared to non-military director firms. We test our predictions using a constructed dataset of archival and secondary sources in the US manufacturing segment during fiscal years 2005 and 2018. Results from this study provide strong support for our hypotheses. We discuss the implications of these empirical findings in the context of corporate governance demographic characteristics and corporate misconduct.