Monitoring the Monitors: How Shareholders and Boards Discipline Ineffective Audit Committee Members and Those Who Serve With Them

Abstract:     
We examine the extent to which ineffective audit committee (AC) members and effective AC members who could potentially be “tainted” by serving alongside ineffective AC members suffer consequences in terms of negative shareholder votes and subsequent removal from the board. We base all tests on a comprehensive set of ineffectiveness indicators extracted from Glass, Lewis & Co. proxy voting recommendations. For shareholder voting, consistent with an agency-theoretic perspective, we find that a greater number of shareholders withhold votes from AC members identified with any type of ineffectiveness, although shareholders do not appear to penalize “tainted” members who serve alongside ineffective members. For board turnover, we observe a different pattern. Specifically, consistent with an institutional-theoretic perspective of protecting the board’s image, both ineffective and “tainted” AC members experience abnormally high turnover when ineffectiveness stems from documented financial reporting failures. In contrast, we do not detect any turnover consequences for individual AC-member characteristics that are merely suggestive of ineffectiveness.

Number of Pages in PDF File: 47

Keywords: audit committee member accountability, audit committee member ineffectiveness, shareholders, boards of directors, board turnover, votes withheld

JEL Classification: G34, M42

working papers series