Tainted Executives as Outside Directors

Abstract

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