Accountability of Independent Directors - Evidence From Firms Subject to Securities Litigation

58 Pages Posted: 27 Jun 2013  

Francois Brochet

Boston University - Department of Accounting

Suraj Srinivasan

Harvard Business School

Multiple version iconThere are 2 versions of this paper

Date Written: June 2013

Abstract

We examine which independent directors are held accountable when investors sue firms for financial and disclosure related fraud. Investors can name independent directors as defendants in lawsuits, and they can vote against their re-election to express displeasure over the directors’ ineffectiveness at monitoring managers. In a sample of securities class-action lawsuits from 1996 to 2010, about 11% of independent directors are named as defendants. The likelihood of being named is greater for audit committee members and directors who sell stock during the class period. Named directors receive more negative recommendations from Institutional Shareholder Services (ISS), a proxy advisory firm, and significantly more negative votes from shareholders than directors in a benchmark sample. They are also more likely than other independent directors to leave sued firms. Overall, shareholders use litigation, along with director elections and director retention, to hold some independent directors more accountable than others when firms experience financial fraud.

Keywords: independent directors, litigation risk, class action lawsuits, director accountability, reputation, boards of directors, corporate governance

JEL Classification: G30, G34, J33, K22, M41

Suggested Citation

Brochet, Francois and Srinivasan, Suraj, Accountability of Independent Directors - Evidence From Firms Subject to Securities Litigation (June 2013). Available at SSRN: https://ssrn.com/abstract=2285776 or http://dx.doi.org/10.2139/ssrn.2285776

Francois Brochet

Boston University - Department of Accounting ( email )

595 Commonwealth Avenue
Boston, MA 02215
United States

Suraj Srinivasan (Contact Author)

Harvard Business School ( email )

Soldiers Field
Boston, MA 02163
United States

HOME PAGE: http://drfd.hbs.edu/fit/public/facultyInfo.do?facInfo=pub&facId=10700

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