Publication Type

Journal Article

Version

acceptedVersion

Publication Date

9-2016

Abstract

Research summary: We examine how board members' reactions following financial misconduct differ from those following other adverse organizational events, such as poor performance. We hypothesize that inside directors and directors appointed by the CEO may be particularly concerned about their reputation following deceptive financial practices. We demonstrate that directors more closely affiliated with the CEO are more likely to reduce their support for the CEO following financial misconduct, increasing the likelihood of CEO replacement. Enactment of the Sarbanes-Oxley Act similarly alters governance dynamics by creating a greater expectation for sound corporate governance. We demonstrate our findings in U.S. public firms that restated their financial earnings during a 12-year period before and after the passage of Sarbanes-Oxley. Managerial summary: Given past concerns about lack of oversight by boards of directors leading to firm financial misconduct, we examine how the relationship between directors and CEOs may be altered in the face of such misconduct. We argue that directors most closely tied to the CEO (inside board members and board members appointed by the CEO), typically the most supportive of the CEO, may become most concerned about their own reputation following financial misconduct. We find that CEOs receive less support from these directors, a finding in contrast to past studies demonstrating that such board members tend to shield CEOs following poor performance. These findings are accentuated following the passage of the Sarbanes-Oxley Act, which places greater responsibility on the CEO for the accuracy of financial reports.

Keywords

board member affiliation, legitimacy, CEO replacement, stigma, restatement

Discipline

Human Resources Management | Strategic Management Policy

Research Areas

Strategy and Organisation

Publication

Strategic Management Journal

Volume

37

Issue

9

First Page

1898

Last Page

1918

ISSN

0143-2095

Identifier

10.1002/smj.2427

Publisher

Wiley: 24 months

Copyright Owner and License

Authors

Additional URL

https://doi.org/10.1002/smj.2427

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