Tainted Executives as Outside Directors

Abstract

We examine outside board appointments of executives allegedly involved in governance failures—“tainted” executives—to shed light on appointing firms’ underlying motivations. Firms with greater advising needs are more likely to appoint tainted executives to their boards than other firms are. Tainted appointees are less likely to be placed on the nominating and governance committees than non-tainted appointees. Tainted appointees have similar or better skill sets compared to non-tainted appointees, and both groups add to boards’ overall skill sets. Firms that appoint tainted executives to their boards display an improvement in operating performance and a lower litigation likelihood in the post-appointment period relative to the preappointment period and relative to a matched control sample. We do not find evidence of poor monitoring outcomes for these firms. Overall, our evidence suggests that firms’ advising needs, not a conspicuous attempt to weaken monitoring, drive the appointment of tainted executives to boards.

Keywords: director appointments, director labor market, class action lawsuits, corporate governance

JEL Classification: G34, K22, M41