Other Unpublished Work
Do Shareholders Hold Independent Directors Accountable? Evidence from Firms Subject to Securities Litigation
We examine if investors hold independent directors accountable when firms are sued for financial fraud. Investors can sue directors and can vote against their re-election to express displeasure over monitoring effectiveness. Using a sample of securities class action lawsuits over the time period 1996 to 2008, we find that about 10% of directors of sued firms are named as defendants (named directors); the likelihood of being named is greater for audit committee directors and directors who sell stock during the class period. Lawsuits with named directors are less likely to be dismissed and settle for larger dollar amounts than other lawsuits. Independent directors in sued firms, especially named directors, receive fewer favorable votes from shareholders and more negative recommendations from proxy advisory firm ISS. Named directors are more likely to leave their positions in sued firms, whereas other independent directors are not. Independent directors, especially named directors, are more likely to lose directorships in other firms but this effect is not reflected in lower shareholder votes in other directorships. While the likelihood of being named as defendant has not increased over time—despite concerns to the contrary—the likelihood of losing board position in the sued firm has increased in the post-2002 period, suggesting a greater sensitivity to retaining sued directors on corporate boards in recent times.
Keywords: Crime and Corruption;
Governing and Advisory Boards;
Lawsuits and Litigation;
Business and Shareholder Relations;
Brochet, Francois, and Suraj Srinivasan. "Do Shareholders Hold Independent Directors Accountable? Evidence from Firms Subject to Securities Litigation." 2011.