Accountability of Independent Directors—Evidence from Firms Subject to Securities Litigation

Francois  Brochet; Suraj  Srinivasan

Article | Journal of Financial Economics | February 2014

Accountability of Independent Directors—Evidence from Firms Subject to Securities Litigation

by Francois Brochet and Suraj Srinivasan

Abstract

We examine which independent directors are held accountable when investors sue firms for financial- and disclosure-related fraud. Investors can name independent directors as defendants in lawsuits, and they can vote against their re-election to express displeasure over the directors' ineffectiveness at monitoring managers. In a sample of securities class-action lawsuits from 1996 to 2010, about 11% of independent directors are named as defendants. The likelihood of being named is greater for audit committee members and directors who sell stock during the class period. Named directors receive more negative recommendations from Institutional Shareholder Services (ISS), a proxy advisory firm, and significantly more negative votes from shareholders than directors in a benchmark sample. They are also more likely than other independent directors to leave sued firms. Overall, shareholders use litigation along with director elections and director retention to hold some independent directors more accountable than others when firms experience financial fraud.

Keywords: independent directors; Litigation Risk; class action lawsuits; director accountability; reputation; boards of directors; corporate governance; Debt Securities; Corporate Accountability; Lawsuits and Litigation;

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Brochet, Francois, and Suraj Srinivasan. "Accountability of Independent Directors—Evidence from Firms Subject to Securities Litigation." Journal of Financial Economics 111, no. 2 (February 2014): 430–449.

Case | HBS Case Collection | November 2016 (Revised April 2018)

Darby's Investment in Sirma: Professionalizing an Entrepreneurial Firm

Suraj Srinivasan and Eren Kuzucu

In March 2010, Burak Dalgın (HBS MBA 2004) led private equity firm Darby's investment in Sırma, a local Turkish water and beverage company. Sırma was owned and managed by members of two Turkish business families. The existing management, while being highly entrepreneurial, had paid less attention to managing the company in a professional manner, leading to a highly leveraged balance sheet and a significant need for financing. After the investment, Sırma introduced new products, opened a new factory, and built up its financial reporting system from scratch. Two years after Darby’s investment, Sırma’s operational performance had improved. However, the company was still suffering from significant financial problems. By early 2013, although Sırma had received two cash injections from Darby, the company still required another round of financing. Dalgın was looking at three potential options: Should Darby make another investment in Sırma? If Darby stayed invested in Sırma, should it replace its managing partners? If Dalgın advised Darby to exit, would that be a premature move?

Keywords: financial reporting; control systems; Variance Analysis; emerging markets; private equity; debt; family ownership; Food and Beverage Industry; Turkey; valuation; Business or Company Management; Private Equity; Financial Reporting; Investment; Budgets and Budgeting; Food and Beverage Industry; Turkey;

Citation:

Srinivasan, Suraj, and Eren Kuzucu. "Darby's Investment in Sirma: Professionalizing an Entrepreneurial Firm." Harvard Business School Case 117-033, November 2016. (Revised April 2018.) View Details

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Accountability of Independent Directors—Evidence from Firms Subject to Securities Litigation

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