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Should Independent Board Members with Social Ties to Management Disqualify Themselves from Serving on the Board?

Journal of business ethics, 2011-03, Vol.99 (3), p.399-423 [Peer Reviewed Journal]

2011 Springer ;Springer Science+Business Media B.V. 2010 ;Springer Science+Business Media B.V. 2011 ;ISSN: 0167-4544 ;EISSN: 1573-0697 ;DOI: 10.1007/s10551-010-0660-5 ;CODEN: JBUEDJ

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Title:
Should Independent Board Members with Social Ties to Management Disqualify Themselves from Serving on the Board?
Author: Hoitash, Udi
Subjects: Audit committees ; Audits ; Board of directors ; Boards of directors ; Business ; Business and Management ; Business audits ; Business Ethics ; Business management ; Business structures ; CEO compensation ; Chief executive officers ; Collaboration ; Committees ; Corporate governance ; Directors ; Education ; Ethics ; Executive compensation ; Financial management ; financial reporting quality ; Independence ; independent directors ; Information sharing ; Management ; Management audits ; Monitoring ; Philosophy ; Professional ethics ; Quality of Life Research ; Shareholders ; Social influence ; social network ; Social network analysis ; Social networks ; Social relations ; social ties ; Stockholders ; Wages & salaries ; Zero
Is Part Of: Journal of business ethics, 2011-03, Vol.99 (3), p.399-423
Description: This paper examines whether independent directors who have social ties to management (inside directors) can effectively perform their fiduciary duty to monitor management on behalf of shareholders. Ex ante, it is not clear whether social ties will enhance or obstruct the quality of board performance. Theory suggests that directors who are socially tied to management are ineffective and would make decisions favoring management. However, social ties can increase trust and information sharing between management and independent directors, improving directors' ability and effectiveness in governing the company (Westphal, J. D.: 1999, The Academy of Management Journal 42(1), 7-24). To examine these contradicting predictions I use social network analysis and construct proxies for social ties between management and independent board members. Using these proxies, I first demonstrate that social ties are associated with higher managerial compensation. Further analyses reveal that these results are driven by social ties that include members of the compensation committee. Conversely, I demonstrate that financial reporting quality is improved when social ties exist. Specifically, I find that the likelihood of material weaknesses in internal controls and the likelihood of financial restatements are lower in companies with social ties. I further observe that this improved quality of financial reporting holds only when social ties include members of the audit committee. I conclude that ethically, socially tied independent directors should disqualify themselves from serving on compensation committees where social independence is essential. However, in tasks where collaboration with management is essential, directors with social links to each other can be of added value to shareholders.
Publisher: Dordrecht: Springer
Language: English
Identifier: ISSN: 0167-4544
EISSN: 1573-0697
DOI: 10.1007/s10551-010-0660-5
CODEN: JBUEDJ
Source: ProQuest One Psychology
Alma/SFX Local Collection
RePEc
ProQuest Central

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Should Independent Board Members with Social Ties to Management Disqualify Themselves from Serving on the Board?

2011 Springer ;Springer Science+Business Media B.V. 2010 ;Springer Science+Business Media B.V. 2011 ;ISSN: 0167-4544 ;EISSN: 1573-0697 ;DOI: 10.1007/s10551-010-0660-5 ;CODEN: JBUEDJ

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