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| Author: | Hoitash, U. |
| Title: | Should independent board members with social ties to management disqualify themselves from serving on the board? |
| Journal: | Journal of Business Ethics
2011 : MAR III, VOL. 99:3, p. 399-423 |
| Index terms: | board of directors directors corporate governance executive remuneration compensation management networks financial reporting quality |
| Freeterms: | social ties |
| Language: | eng |
| Abstract: | This paper explores if independent directors with social ties (henceforth as: soc-ts.) to management (inside directors) can effectively perform their fiduciary task to monitor management on behalf of shareholders. To deal with a set of contradicting predictions, social network analysis is used and proxies built for soc-ts. btw. management and independent board members. Using these proxies, soc-ts. are shown to be associated with higher managerial compensation. Further analyses uncover that these results are driven by soc-ts. including members of the compensation committee. Conversely, it is shown that financial reporting quality is improved with existing soc-ts. Specifically, it is found that the likelihood (as: l-hood) of material weaknesses in internal controls and the l-hood of financial restatements are lower in companies with soc-ts. It is concluded that ethically, socially tied independent directors should disqualify themselves from serving on compensation committees with social independence being essential. |
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