Study shows that independence can reduce corporate misconduct
Investors looking to reduce the risk of corporate misconduct in firms they invest in should take a look at their governance structure.
Those companies which have boards that are more independent from the management are less likely to become embroiled in corporate misconduct.
A new meta-analysis of nearly 80,000 firms in 20 countries also shows that the independence of audit committees offers the strongest protection. However, in countries where corruption is prevalent, the impact of independence can be overpowered.
Researchers defined corporate misconduct as “activities or actions that organizational members engage in to deceive or swindle investors or other key stakeholders, including acts that violate laws or regulations or that are legal but are considered morally wrong.”
The study by Lehigh University looked at three different ‘sites’ of independence: the overall board, audit committees, and CEO-chair separation.
"Examining board independence in relation to misconduct is important, given the far-reaching negative consequences of misconduct," the researchers said. "Corporate misconduct damages firm reputation, increases employee turnover, harms customers and other stakeholders, and ultimately incurs losses for shareholders."
Researchers found that, since the financial crisis, many large corporations have moved to establish greater independence between board and management.
Co-author Corrine Post, professor of management at Lehigh University, says the research examined previous studies and data.
"Because the empirical evidence is mixed, we set out to draw on the universe of studies and available data to settle the question," Post said. The researchers identified all existing studies on board independence and organizational misconduct, conducting a meta-analysis of 135 studies representing almost 80,000 firms in more than 20 countries.”
Corinne Post, Ph.D., holds the Scott Hartz '68 Term Professorship at Lehigh University, where she is chair of the Department of Management. Credit: Lehigh University.
The findings of the study suggest that investors are best protected from corporate misconduct where the audit committee is independent, but independence of the board and a separate CEO and chair is also key.
The full findings are published in the Journal of Management.
