Do overlapping audit and compensation committee memberships contribute to better financial reporting quality? Empirical evidence for the German two-tier system

Abstract

Strengthening audit committee effectiveness is a key challenge from a research, regulation and corporate practice perspective. Audit committees' monitoring role in financial reporting is of great importance for shareholders and other stakeholder groups. This empirical-quantitative study examines overlapping membership in the audit and compensation committees and its impact on financial reporting quality. The analysis covers a sample of German firms listed on the 'DAX', 'TecDAX' and 'MDAX' for the business years 2010-2016 (426 firm-year observations). Correlation and regression analyses were conducted to evaluate the link between two overlapping variables and financial reporting quality. While the first overlapping variable (proportion of audit committee members who also sit on the compensation committee) contributes positively to accrual quality (as financial reporting quality), no significant results were found for the second overlapping variable (the existence of an independent financial expert as an overlapping member). The main result holds for robustness checks and has major implications in the German two-tier system.

Board governance mechanisms and sustainability reporting quality: A theoretical framework

“…For example, Bhuiyan (2014, 2016) observed that overlapping membership is known for spillover of knowledge that increases expertise and the committees' quality of monitoring. This is supported by previous investigations which concludes that directors' overlap improves corporate reporting quality (Chandar et al, 2012;Fernández Méndez et al, 2017;Habib & Bhuiyan, 2016;Madi et al, 2015;Velte, 2017). On the contrary and consistent with the busyness hypothesis (Tanyi & Smith, 2015), committee members overlap leads to overcommitment that could diminish the effectiveness of individual committees as they become very busy and thereby negatively affecting the quality of corporate disclosures (Kalelkar, 2017;Laux & Laux, 2009;Liao & Hsu, 2013).…”

“…Such effective communication has been established to be made possible through overlapping directorship (Samuel et al, 2019). Overlapping directorship is a situation in which a board member serves simultaneously or concurrently on two or more board committees (Chandar et al, 2012;Velte, 2017). For instance, an audit committee member serving on the compensation committee simultaneously (Kalelkar, 2017).…”

“…Moreover, studies have documented that over 60 % of sampled companies at least have a member serving concurrently on both audit and compensation committees (Liao & Hsu, 2013). However, most of the studies relating to directors' overlap concern the quality of financial reporting, audit effectiveness, and firm value with mixed findings (e.g., Chandar et al, 2012;Kalelkar, 2017;Karim et al, 2016;Liao & Hsu, 2013;Samuel et al, 2019;Sassen et al, 2018;Srinidhi, 2019;Velte, 2017). For example, Bhuiyan (2014, 2016) observed that overlapping membership is known for spillover of knowledge that increases expertise and the committees' quality of monitoring.…”

“…Board gender diversity is viewed from the perspective of critical mass which bothers on the number of female directors (at least 30%) as against mere or token representation of one female director on the board, which has been less examined in terms of SRQ. The study also highlights the association of board communication in terms of overlapping directorship with SRQ, as directors overlap has been studied more relating to firm value, boards' monitoring effectiveness, and the quality of corporate financial reporting (Kalelkar, 2017;Samuel et al, 2019;Sassen et al, 2018;Velte, 2017) compared to SRQ. Equally, examining SRQ from the perspective of board integrity is rare, especially in the Malaysian context.…”

Audit Committee Chair Attributes and Audit Report Lag in an Emerging Market

“…Habib and Bhuiyan (2016) have provided supporting evidence on the positive relationship between overlapping membership on audit and compensation committees with the FRQ. Furthermore, Velte (2017) has found that AC members concurrently have a seat in the compensation committee contribute to increasing the FRQ as a proxy of accrual quality. These findings suggest that the AC overlap produces higher FRQ.…”