Tainted Executives as Outside Directors

Abstract

We find that executives allegedly involved in governance failures (“tainted” executives) continue to gain outside directorships. Firms with greater advising needs tend to appoint tainted executives to their boards. Relative to non-tainted executives, tainted executives are less (more) likely to join board committees whose primary function is monitoring (advising). Appointing firms subsequently experience higher sales growth and lower incidence of litigation. Overall, 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 highlight the limitations of ex-post settling up in the director labor market.

Keywords: board of directors, director labor market, class action lawsuits, corporate governance

JEL Classification: G34, K22, M41