stanord closer look series 2
Scarlet letter: are the ceOS and directOrS Of failed cOmpanieS “tainted”?
that experienced substantial accounting and ethi-cal problems can be a good board member at an-other company. By contrast, 67 percent o respon-dents believe that directors o such a company canbe a good board member elsewhere. When askedto elaborate, respondents tend to suggest that theCEO is held to a higher standard o accountability,given his or her position o leadership. By contrast,directors are presumed to have less involvement inpotential violations and are also seen as able to learnrom mistakes o this nature. However, these opin-ions are not universal (see Exhibit 2).
Why This MaTTers
1. In recent years, there have been many large- andsmall-scale corporate ailures, driven in part by ethical, accounting, or risk management impro-prieties. However, the executives and directorso these companies have in many cases gainedemployment as directors o other rms. Shouldthis be a concern or shareholders o these rms?2. Executives and directors oten suer reputation-al damage rom their association with a ailedcompany. What is the standard by which their“culpability” should be judged? When are theseindividuals t to hold uture directorships, and when are they “too tainted” by their experience?3. How plausible is the argument that an oceror director involved in an accounting or ethicalproblem “should have learned valuable lessonsrom the experience” that makes them a valuableboard member or other companies?
Zoe-Vonna Palmrose, Vernon J. Richardson, and Susan Scholz, “De-terminants o Market Reactions to Restatement Announcements,”
Journal of Accounting & Economics
Mark Grothe and Poonam Goyal, “rend Report Restatements: Re-statement Dust Settles,” Glass Lewis (March 19, 2009).
Approximately 200 class-action lawsuits are led each year againstpublic companies or ederal securities violations. See StanordLaw School and Cornerstone Research, “Securities Class ActionClearinghouse.” Available at:http://securities.stanord.edu/.
Marne L. Arthaud-Day, S. revis Certo, Catherine M. Dalton, andDan R. Dalton, “A Changing o the Guard: Executive and Directorurnover Following Corporate Financial Restatements,”
Academy of Management Journal
Suzanne Craig and Peter Lattman, “Companies May Fail, but Di-rectors Are in Demand,”
Te New York imes
(Sep. 14, 2010); and Joann Lublin, “Staying on Boards ater Humble Exit,”
Te Wall Street Journal
(Jun. 6, 2011).
For this reason, the cause o a corporate ailure must be clearly diag-nosed and managerial ailures distinguished rom governanceailures.
For example, in 2002, the AFL-CIO circulated a letter urging allpublic companies to remove rom their board any directors who hadalso served on the board o Enron. See Reed Abelson, “Endgame?Some Enron Board Members Quit or Face Ouster at Other Compa-nies,”
Te New York imes
(Feb. 9, 2002).
Heidrick & Struggles and the Rock Center or Corporate Gover-nance at Stanord University, “2011 Corporate Board o DirectorsSurvey,” (2011).
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Corporate Governance Matters.
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