TheCorporateCounsel.net

CEOs at companies involved in high-profile financial reporting or governance scandals often find themselves out of a job and face difficulties finding new executive positions. Interestingly, a new study points out that these “tainted” CEOs don’t face the same challenges when it comes to keeping existing board seats or obtaining new ones.

The study concludes that the likely explanation for this is that the value they add outweighs their baggage, which can be managed by limiting their role on the board. Here’s an excerpt from a recent CLS Blue Sky blog by the authors of the study:

Our empirical tests yield five key findings. First, firms with powerful CEOs or weak monitoring are not more likely than other firms to appoint tainted executives to their boards. In contrast, tainted executives tend to join the boards of less visible firms or those with greater advising needs. Second, firms generally avoid placing tainted directors on nominating and governance committees, both of which have important monitoring responsibilities. Instead, these directors often serve on committees that play more of an advisory role.

Third, the skills of tainted and non-tainted appointees are similar, and the evolution of board-level skills is comparable in firms appointing tainted and non-tainted executives to their boards. Fourth, after appointing tainted executives to their boards, firms perform better than a matched control sample. This effect is more pronounced for firms with greater advising needs. Importantly, firms with tainted appointees are not monitored less effectively.

The study also says that shareholder satisfaction with board’s performance remains stable or even improves after these tainted CEOs become directors, suggesting that their appointments meet the needs of the board.

– John Jenkins