Director Departures Research Articles

Director Liability Protection and the Quality of Independent Directors

We study whether legal liability protection helps companies to recruit and retain high-quality independent directors. We conduct difference-in-differences analyses exploiting the 1999 Ninth Circuit Court of Appeals Ruling on the Silicon Graphics case, which substantially raised the bar for filing securities class action (SCA) lawsuits as a shock. We document supporting evidence for the talent attraction hypothesis by showing improvements in newly recruited independent director quality following the ruling, but only for candidates who are previously not exposed to SCA litigation risk. The effects are stronger for firms facing greater litigation risk ex ante or smaller local supplies of director candidates. Results are more evident for experience-based quality dimensions. We also analyze a sample of voluntary independent director departures and find little support for the talent retention hypothesis, suggesting that more complex factors enter into a director’s continuation decision once a director is already exposed to SCA litigation risk. A policy implication is that liability protection can be useful in attracting more unexposed high-quality candidates to the pool of public boards but does little to attract high-quality candidates who are already in the pool of public firms. This paper was accepted by Gustavo Manso, finance. Funding: H. Zou acknowledges the financial support from a competitive General Research Fund (GRF) grant from the Research Grants Council of the Hong Kong Special Administrative Region, China [Project No. HKU 17513816]. S. Shen acknowledges the financial support from the National Natural Science Foundation of China [Grants 72202164 and 72332003]. The work was partially carried out while R. W. Masulis visited the University of Hong Kong as an FBE visiting researcher, and he thanks the Faculty of Business and Economics of the University of Hong Kong for its sponsorship. Supplemental Material: The online appendix and data files are available at https://doi.org/10.1287/mnsc.2020.03743 .

Departures of Tainted Outside Directors: A Threshold Approach From Two Competing Theoretical Perspectives

Although a tainted outside director’s social status may serve as a buffer against devaluation owing to an affiliate firm’s corporate financial misconduct, the extent of this buffer effect is unclear. We propose a threshold approach by introducing the expectancy violation perspective, which generates a theoretical tension from the network-embeddedness perspective, to clarify the following question: From which perspective does the buffer effect of social status become more salient? Specifically, we propose an inverted U–shaped relationship between the directors’ social status and the departure of tainted outside directors from host firms. We theorize that when directors’ social status exceeds a certain threshold, the network-embeddedness perspective is more dominant than the expectancy violation perspective. Moreover, a host firm’s external stakeholder attention and board social status moderate the inverted-U effect such that its turning point shifts to the right because such contingencies increase the threshold for the buffer. Using a sample of tainted outside directors penalized for associated firms’ financial misconduct, we find evidence that supports our predictions. Our study helps clarify the boundary between the competing theoretical perspectives of expectancy violation and network embeddedness to explain the phenomenon of tainted director departure.

Non-Traditional Director Departure and Earning Management

Non-Traditional Director Departure and Earning Management

Антисоветская этика и эстетика фильма М. Захарова «Убить дракона» в дискуссиях на цифровых площадках

The study of the temporal transformation of attitudes to the ethical and aesthetic values of the Perestroika era in post-Soviet Russia is proposed through the analysis of the modern audience reception of its film products. Feature films are defined as a source of information about the dominant meanings of the era when they were created. The main attention in this article will be paid to the ethical and aesthetic components of the film "To Kill the Dragon" (directed by M. Zakharov), which was released on Soviet screens in 1988, as well as its reading by Russians in the 21st century. The present research contributes to understanding the nature of the modern perception of ethical and aesthetic ideas, important during the period of Perestroika and encoded in M. Zakharov's film script. The study of the factors of critical (and insufficient) attention to the film now contributes to understanding the relevance of the period of Perestroika for understanding the processes of the 21st century. As a result of the analysis of the modern reception of Mark Zakharov's film in the media space (in particular, in the form of reviews on the Kinopoisk, reviews of Yandex and others), three strategies of audience comment were identified: philosophical, film critical and political science. The analysis of the modern reception of Mark Zakharov's film allows us to conclude not only about its relevance in the 21st century, but also to identify factors that make it difficult to perceive it positively. The film disgusts young viewers with its aesthetics, and experienced ones with its opportunism. The free interpretation of the play by Evgeny Schwartz, the director's departure from the spirit and letter of the original source in our time has become much more sharply criticized. Viewers are upset by Mark Zakharov's lack of a direct forecast of the development of history after the victory over the Dictatorship of the Dragon.

Director departure following political ideology (in)congruence with an incoming CEO

AbstractResearch SummaryPolitical ideologies play a critical role in how individuals view the world and their social interactions. Management scholars have theorized about how executives' politics may influence their firms' activities, but organizational research has not yet fully embraced the political science logic that bidirectional ideological alignment is perhaps the most influential factor in crafting social circles. We incorporate this perspective by theorizing about how political ideology (in)congruence between an incoming CEO and directors impacts whether those directors retain their seat or depart from the board. Coalescing political research with the socio‐behavioral view of directorships, we argue that ideological incongruence is related to departure and congruence enhances retention. In post hoc analyses, we also uncover preliminary evidence that the salience of ideological incongruence supersedes congruence in director departure.Managerial SummaryExecutives' political ideologies have a profound impact on the organization, so it is imperative to understand whether the political views of those in the upper echelons play a role in cultivating who sits at the apex of the firm. In this study, we find that directors are inclined to remain on the board when they share a political ideology with an incoming CEO, but that they are also apt to depart from their positions when their political views do not align with the incoming CEO. In intriguing quantitative analyses, we also unearth that, like most individuals in society, directors are perhaps more repelled by a CEO with an opposing political ideology than they are attracted to a CEO with similar political leanings.

Economic consequences of tax director departure

ABSTRACT This study investigates the economic consequences of the departure of a tax director. In addition, we examine whether the market reactions to such a departure are associated with the director’s gender. Using a sample of 471 U.S. firms, we find positive market reactions to the announcement of tax director departures. Our results further show lower cumulative abnormal returns for female tax directors than for male tax directors. Our findings suggest that the market values tax directors’ departure and gender. Our study has implications for practitioners in terms of the selection of tax directors.

Are All Directors Treated Equally? Evidence from Director Turnover Following Opportunistic Insider Selling

This study investigates the likelihood of director turnover following opportunistic insider selling. Given that opportunistic insider selling may be costly to a firm due to potential legal risk and firm legitimacy concerns, we hypothesize that directors engaging in this type of transactions have a higher likelihood of subsequently leaving the board. Using archival data of 11,409 directors in 2280 US firms from 2005 to 2014, univariate comparisons show that directors engaging in opportunistic insider selling are about 8% more likely to exit their firms’ board compared to directors not engaging in this behavior. Furthermore, multivariate results show that the likelihood of director departure following opportunistic insider selling is higher for some directors but not all. Specifically, directors who are especially valuable to the board or costly to replace do not seem to experience elevated levels of turnover. Interestingly, this difference in director turnover is only observed in smaller firms. We find that in larger firms, the likelihood of director turnover following opportunistic insider selling does not depend on director characteristics. As such, results seem to suggest that boards do not homogeneously self-regulate in this context as some directors seem to be shielded from turnover following unethical behavior.

Why Do Directors Join Poorly Performing Firms?

AbstractPrior research has suggested that sitting on the board of a poorly performing firm (PPF) can be undesirable to directors. Still, almost 60% of such firms are able to appoint new directors following director departures. Contrary to a quality matching explanation, we do not find that only poorly performing directors join these firms. Upon joining PPFs, directors are more likely to fill leadership positions without necessarily receiving higher pay. These directors subsequently receive career benefits, especially those who are relatively junior in the pool. As such, the evidence is consistent with the leadership positions providing a certification effect.

Economic theory and social pressure: audit committee director departures in India

Purpose This study aims to examine the resignations of Indian audit committee directors after a systemic shock (failure of Satyam Computer Services Ltd.). Design/methodology/approach The authors develop the research questions based on interviews with company directors and audit partners, in addition to economic theory. The authors then use archival data to test the research questions. Findings The authors find that social and peer pressure is a very important factor in explaining such departures and provides the basis for some counter-intuitive empirical results, for example, directors were less likely to resign from companies audited by Indian affiliates of PricewaterhouseCoopers even though Satyam was audited by one such auditor and ownership by founding families was not associated with director departures. Research limitations/implications Going beyond economic theory and analyzes can be useful in examining issues related to corporate boards and audit committees. Practical implications Regulators should consider requiring disclosure about director attendance percentages, in addition to the number of meetings, at audit committee – and, perhaps, other board sub-committee – meetings. Social implications Caution is warranted when using results from the USA and other Anglo-Saxon countries to address governance-related issues in India or other Asian countries. Originality/value A triangulation of economic theory and societal norms enables us to gain valuable insights about the resignations of audit committee directors in India.

Board committees and director departures

AbstractWe examine whether directors utilize private information obtained through their committee memberships to depart from firms prior to the revelation of their poor performance. Such departures raise the concern that directors leave the firm when they are most needed. Utilizing private information to make decisions in their personal interest may also violate the directors’ fiduciary duties. We focus on departures of audit committee members since information regarding earnings quality should be available to them prior to public release. The departure of audit committee members who serve on multiple boards is coincident with a deterioration in earnings quality. Other directors do not appear to time their departure based on declines in earnings quality. Results from examining the reasons behind this finding are consistent with the director's preference to lead a “quiet life” and a desire to lower their exposure to litigation risk rather than to protect their reputation in the director market.

Board Committees and Director Departures

We examine whether directors utilize private information obtained through their committee memberships to depart from firms prior to the revelation of their poor performance. Such departures raise the concern that directors leave the firm when they are most needed. Utilizing private information to make decisions in their personal interest may also violate the directors’ fiduciary duties. We focus on departures of audit committee members since information regarding earnings quality should be available to them prior to public release. The departure of audit committee members who serve on multiple boards is coincident with a deterioration in earnings quality. Other directors do not appear to time their departure based on declines in earnings quality. Results from examining the reasons behind this finding are consistent with the director’s preference to lead a “quiet life” and a desire to lower their exposure to litigation risk rather than to protect their reputation in the director market.

Fight or flee: Outside director departures prior to contested management buyout offers

AbstractResearch Question/IssueWe investigate outside director departures prior to management buyout offers (MBOs). In these transactions, managers have both an information advantage and incentives to make a lowball offer to shareholders. Outside directors can safeguard against managerial self‐dealing by negotiating for the best terms for public shareholders from either management or another bidder.Research Findings/InsightsIt is typical that outside directors stay on the board through an MBO offer as MBOs are less likely to have changes in directors—either joining or leaving—relative to a control sample. After controlling for endogeneity as well as firm and director characteristics, we find that outside directors are more likely to leave when the offer is later contested. We do not find any evidence that departing directors are replaced by new outside directors who ensure shareholders get a higher premium nor do we find any evidence that the board acts as a public auctioneer. We also find that outside directors are more likely to depart when the buyout contest is longer. Our findings show that outside directors provide a weak internal monitoring mechanism as they leave precisely when shareholders need their expertise the most.Theoretical/Academic ImplicationsOur results contribute to research that supports the notion that outside director departures are symptomatic of board weakness. The results of our study support the contention of other researchers that outside directors often fail to monitor managers.Practitioner/Policy ImplicationsOur study offers useful information to M&A investment banking advisors and leverage buyout analysts by showing the mechanisms under which director turnover can affect the value and the outcome of MBOs.

Why Do Directors Join Poorly Performing Firms?

Prior research has suggested that sitting on the board of a poorly performing firm can be undesirable to directors. Yet, almost 60% of these firms are able to appoint new directors following director departures. Contrary to a quality matching explanation, we do not find that only poorly performing directors join these firms. Upon joining poorly performing firms, directors are more likely to fill the leadership positions, without necessarily receiving higher pay. These directors subsequently receive career benefits, especially those who are relatively junior in the pool. As such, the evidence is consistent with the leadership positions providing a certification effect.

How do restatements affect outside directors and boards? A review of the literature

This paper reviews academic literature related to the consequences that outside directors and boards may face in the wake of earnings restatements and suggests directions for future research. We examine loss of board seats; recruitment of new directors; proxy recommendations and shareholder support; pre-emptive director departures; director wealth effects; director reputation, litigation, and sanction risks; international evidence; and legal proposals for reform. The overall picture that emerges from the literature is that directors’ primary risk in the wake of earnings restatements is loss of board seats, in part through adverse proxy advisor recommendations and reduced shareholder support. Directors typically face little risk of legal liability or SEC sanctions, and some directors pre-emptively leave a problem company’s board and reduce their loss of interlocked board seats. Some legal scholars have called for director liability to be increased so as to promote more vigilant board oversight. Companies often focus on increasing the independence of the board in the wake of a restatement in an effort to repair organizational reputation. While researchers have revealed a host of important findings to date, much more can be learned about the effects of restatements on outside directors and boards.

Consequences of Restatements for Outside Directors

This paper reviews academic literature related to the consequences that outside directors and boards may face in the wake of earnings restatements and suggests directions for future research. We examine loss of board seats; recruitment of new directors; proxy recommendations and shareholder support; pre-emptive director departures; director wealth effects; director reputation, litigation, and sanction risks; international evidence; and legal proposals for reform. The overall picture that emerges from the literature is that directors’ primary risk in the wake of earnings restatements is loss of board seats, in part through adverse proxy advisor recommendations and reduced shareholder support. Directors typically face little risk of legal liability or SEC sanctions, and some directors pre-emptively leave a problem company’s board and reduce their loss of interlocked board seats. Some legal scholars have called for director liability to be increased so as to promote more vigilant board oversight. Companies often focus on increasing the independence of the board in the wake of a restatement in an effort to repair organizational reputation. While researchers have revealed a host of important findings to date, much more can be learned about the effects of restatements on outside directors and boards.

CEO Compensation after Harvester Director Departure

I examine the effects of board member departures on CEO compensation using a sample of high-growth IPO firms. Agency theory predicts that a reduction in board monitoring by harvester directors (VCs and private equity investors) will result in an increase in CEO pay. I find that departures of the last harvester director on a board result in an immediate and lasting increase in CEO equity compensation, while prior departures by other harvester directors are not significant. The results hold even when controlling for other governance mechanisms, such as CEO wealth, CEO turnover, board composition, and external blockholder ownership.

Gender diversity on corporate boards: does critical mass matter to investors

Previous studies have been unable to establish a clear relationship between board gender diversity and firm performance. We argue that this could be due to the failure of these studies to account for both the endogeneity problem and the possible nonlinearity of the relationship between board diversity and firm performance. We overcome these problems by studying the investor reaction at the announcement of a female director's departure. We find a negative market reaction only when this departure drops the gender diversity below a critical level of three women. In all other cases, a director's departure has no significant impact on shareholder wealth. This result is consistent with the assumption of value in diversity and critical mass theory.

Gender diversity on corporate boards: does critical mass matter to investors

Previous studies have been unable to establish a clear relationship between board gender diversity and firm performance. We argue that this could be due to the failure of these studies to account for both the endogeneity problem and the possible nonlinearity of the relationship between board diversity and firm performance. We overcome these problems by studying the investor reaction at the announcement of a female director's departure. We find a negative market reaction only when this departure drops the gender diversity below a critical level of three women. In all other cases, a director's departure has no significant impact on shareholder wealth. This result is consistent with the assumption of value in diversity and critical mass theory.

Do Independent Director Departures Predict Future Bad Events?

Do Independent Director Departures Predict Future Bad Events?

LA County sees no loss of momentum from departure of health director

LA County sees no loss of momentum from departure of health director