Board design and governance failures at peer firms

Abstract

Research Summary Our study introduces board committees as a crucial determinant of board actions. We examine how directors who structurally link different board committees—referred to as multi‐committee directors (MCDs)—explain why some board actions are merely symbolic while others are more substantive. As a baseline, we argue that boards in general respond to financial restatements at peer firms by symbolically appointing new directors who are relatively inexperienced and unlikely to have a substantive impact. In contrast, boards with audit–nomination MCDs are more likely to take the substantive action of appointing new directors with the prior experience necessary to reduce the risk of their own future financial restatement. We combine qualitative interviews and a causal identification strategy using an original dataset covering Russell 3000 firms from 2001 to 2014. Managerial Summary Committees play a central role in how boards carry out their governance responsibilities. This study shows that assigning directors to multiple board committees can improve governance performance under certain conditions. Specifically, when external events focus attention on the board's monitoring role, the presence of multi‐committee directors (MCDs) that link the audit and nomination committees is associated with the subsequent appointment of more experienced directors and a reduction in the likelihood of future financial restatements and lawsuits. Because these specific board configurations can have substantive implications for governance effectiveness, we recommend that board leaders be deliberate in how they allocate board committee assignments and treat board committee structure as an intentional organizational design choice that can meaningfully improve governance outcomes.

Nomination and remuneration committee: a review of literature

“…The presence of an independent director or board and independence in the nomination and remuneration committee are measured using a dummy variable, giving a value of 1 if there are independent members and a score of 0 if not (Appiah and Chizema, 2016;Kanapathippillai et al, 2016;Ruigrok et al, 2006), which used the percentage of the number of independent members (Eulaiwi et al, 2016;Nyambia and Hamdan, 2018). The number (size) of nomination and remuneration committee members and meetings is measured by adding all committee members and the number of meetings in one year (Alkalbani et al, 2019;Appiah and Chizema, 2016;Gai et al, 2021). For experience, monitoring and expertise, Chaudhry et al (2020) used a dummy variable given a score of 1 if the committee chairperson had expertise in human resources.…”

“…found that the size of the nominating committee increases the gender diversity of the board. Gai et al (2021) find the number of committees increases with new directors, new directors with board experience and new directors with audit experience. Therefore, we believe that the greater the number of committee members, the greater the supervision of the board's performance and the higher the quality of the board candidates who will lead the company.…”

“…The quantitative research of Gai et al . (2021), taking an observation period from 2001 to 2014 with a sample of 6,302, examines how the structure of USA boards of directors links multi-committee directors in responding to financial restatements.…”

Toward a knowledge‐based view of the board: Modeling board intrafirm knowledge networks

“…We build on this approach and apply it to boards of directors to construct a dynamic intrafirm board knowledge network, wherein knowledge exchanges occur when two directors with knowledge stocks in two distinct functional domains are linked through joint committee memberships on the board (i.e., two directors who have distinct, yet complementary knowledge stocks and share proximity through joint committee memberships are more likely to have a functional relationship and exchange knowledge with one another) 2 . Research has provided evidence that key board processes (e.g., decision‐making) largely take place in board committees (Brandes et al, 2016; Gai et al, 2021; Kolev et al, 2019) and that directors typically serve on multiple board committees simultaneously (Brandes et al, 2016), providing opportunities for knowledge exchange.…”

Behavioral Intention to Use FinTech in Millennial Generation (Extension of TAM Model)

“…FinTech provides ease of transaction in the financial field and aims to maximize the use of technology in speeding up financial services (Purba, 2020). FinTech is more dynamic in adapting to changes in the financial services sector (Chiu & Iris, 2016); (Gai et al, 2021).…”