Now I Must Go: When Outside Directors Exit After a Personal Indiscretion by Top Management

Abstract

The literature on corporate misconduct has long established that directors are apportioned some blame for corporate misconduct events. However, this research has primarily focused on a few limited types of corporate wrong-doing that are associated with directors explicit mandated tasks. The extent to which directors are accountable for a misconduct event that is more tangential to their mandated roles and is considered an implied ethical responsibility is underexplored. We argue, and provide evidence from a unique sample of personal integrity indiscretions by executives, that stakeholders will hold executives accountable for executive misconduct. We find director exit is substantially greater than matched non-incident firms and that director departure is greater when media attention and criticism are higher. Unlike in other types of incidents when the board may allay some concerns by firing the CEO, we show that director exit is greater when the CEO is also dismissed presumably because this may be related...