The Influence of Board Characteristics On The Frequency of 10-K Investigations of Firms In The Financial Services Sector

TLDR: For example, Sonnefeld et al. as discussed by the authors examined the impact of board member composition (number of outside directors, board tenure, board size, and the number of other boards on which directors serve, on the number or legal proceedings brought against the sample firms by various individuals, groups, and federal and state agencies.

Abstract: This study examined thepossible impact of board member composition (number of outside directors), board tenure, board size, and the number of other boards on which directors serve, on the number of investigations and/or legal proceedings brought against the sample firms by various individuals, groups, and federal and state agencies. A sample of 180 firms were selected for study from the financial services sector of the economy for the years 1998-2002. The results suggest that, contrary to theory, neither the proportion of outside directors or board size had a significant affect on the number of investigations brought against the sample firms. Further, as predicted, the results revealed a significant and negative link between board tenure and the number of l OK investigations, and a significant and positive relationship between the number of other boards served on by directors and the number of investigations. Although contrary to theory, this last finding offers some evidence that directors who serve on several other boards may become too distracted to properly monitor their firms. ********** Corporate governance continues to be an area of interest to researchers, stakeholders, and the general public (Sonnefeld, 2004). The influence of board characteristics on firm financial performance has been heavily researched over the past few years. Such board characteristics as board size, board tenure, number of inside and outside directors, number of female board members, and number of other boards on which members serve have been related to a variety of firm performance measures. Dalton, Daily, Ellstrand and Johnson (1998) and Dalton, Daily, Johnson and Ellstrand (1999) performed a meta-analysis to summarize the often-conflicting research results in this area and concluded that there is little evidence that board characteristics influence firm financial performance. Researchers have also begun to examine the influence of board characteristics on aspects of firm performance beyond financial performance. It is suggested that there may be incompatible interests between managers and stakeholders which may adversely affect the social performance of an organization (Simerly, 1995). One view is that the primary responsibility of a business is to maximize profit. This may give social performance and responsibility a back seat, or perhaps even divert resources away from social performance. The stakeholder view is that businesses are given legitimacy by society and, therefore, have a responsibility to behave in a socially responsible manner (Freeman, 1984). An integrative view is that social responsibility may actually contribute to business success (Werner, 1992). Wood (1991a, 1991b) has described "corporate social performance" as consisting of three components. The first component, corporate social performance, has to do with firm public responsibility and legitimacy within society. The second component is corporate social responsiveness and includes environmental assessment and stakeholder management. The third component consists of the outcomes of firm behavior and includes social impacts, social programs, and social policies. Obviously, corporate social performance can be measured in a variety of ways and this has lead to conflicting research results to date (Stanwick & Stanwick, 1998). One dimension of firm behavior related to corporate social performance is the legality of a firm's actions. Kesner and Johnson (1990) examined the relationship between board characteristics and shareholder lawsuits in the state of Deleware. They found a positive relationship between the proportion of inside directors and the likelihood of a firm's board of directors being sued by a shareholder for failure to maintain their fiduciary responsibilities. They also tested for the possibility that shareholders tend to file more lawsuits when firm performance is poor, by controlling for both return on assets and return on equity, and found no support for this hypothesis. …