Whitman Voices

Introduction

What Motivates a Corporate Board to Dismiss a CEO in the Wake of Financial Misconduct

What Motivates a Corporate Board to Dismiss a CEO in the Wake of Financial Misconduct

David Park, assistant professor of entrepreneurship, with Warren Boeker (University of Washington) and David Gomulya (Singapore Management University), conducted a study on the relationship between boards of directors and CEOs and the strategy for handling financial misconduct. The paper, “Political Ideology of the Board and CEO Dismissal Following Financial Misconduct”, was published in Strategic Management Journal in January 2020.

The research focused on the following two questions: Why are some boards refusing to take serious action against CEOs who have committed financial misconduct and how might a board’s beliefs or assumptions influence how it responds to organizational misconduct?

Park hypothesizes that there is a positive correlation between a politically conservative board and a CEO dismissal after a company faces financial misconduct.

The researchers determined that board ideology has a significant impact on who is blamed for such conduct. After reviewing earnings of U.S. S&P 1500 firms that were charged with financial misconduct, Park and others concluded that conservative board members were more likely to eject their CEO following the incident than were more liberal board members.

Research on the relationship between a CEO and a board has been done based on agency arguments, said Park, such as board independence and loyalty to the CEO. The structure of each board has a great influence on how the CEO is handled during financial misconduct, according to some studies, but Park takes a fundamental approach to the topic to discover whether board members’ political beliefs affect the way they act upon their CEO.

Park and others concluded that the two primary effects on how a board member makes decisions about the CEO are ideo-attribution and threat management. Park defines the ideo-attribution effect as how people “assess and attribute causality when observing the actions of others.” Specifically, the ideo-attribution effect says that conservative-minded people tend to attribute blame based on a person’s character, while liberal-minded people will generally attribute blame to situational or external factors.

Threat management suggests that a board’s decisions are affected by the way it perceives a threat to its organization. Because conservatives typically sense more threat and danger than do liberals, Park supposes more conservative boards would act on financial misconduct as a larger threat than would liberal boards and act upon it more severely.

This hypothesis was tested by examining S&P 1500 firms from 2003 to 2012 that had financial misconduct and had to restate their earnings to the SEC. After exclusions and exceptions for different variables irrelevant to the study, the researchers studied 276 firms with the dependent variable being the dismissal of a CEO and the independent variable being political ideology information collected from individual campaign donation records.

In an effort to solve the mystery of financial conduct that is constantly covered by the media and discussed among policymakers, Park and colleagues attempt to discover the truth behind such a significant issue for companies and to explain why board members make a decision to dismiss their CEO following financial misconduct.

Learn more about research being completed by the faculty at Whitman.

Karley Warden