Tainted Executives as Outside Directors
45 Pages Posted: 24 Jun 2017 Last revised: 30 Mar 2020
Date Written: March 27, 2020
We examine the rationale behind and the consequences of the decision to appoint executives allegedly involved in governance failures (“tainted” executives) as outside directors. We find that firms with greater advising needs as well as those that can benefit more from a given director’s advising ability tend to appoint tainted executives to their boards. Relative to non-tainted executives, tainted executives are less likely to join board committees whose primary function is monitoring. Firms appointing tainted executives to their boards subsequently experience higher growth and similar monitoring outcomes compared to firms that appoint non-tainted executives. Overall, our evidence suggests that firms appoint tainted executives to boards for these individuals’ advising reputation and not in a conspicuous attempt to weaken monitoring. Our results also point to a “soft-landing” for tainted executives in the director labor market.
Keywords: board of directors, director labor market, class action lawsuits, corporate governance
JEL Classification: G34, K22, M41
Suggested Citation: Suggested Citation