Political ideology of the board and CEO dismissal following financial misconduct

• Published date: 01 January 2020
• Author: David Gomulya,U. David Park,Warren Boeker
• DOI: http://doi.org/10.1002/smj.3088
• Date: 01 January 2020

RESEARCH ARTICLE

Political ideology of the board and CEO dismissal

following financial misconduct

U. David Park

1

| Warren Boeker

2

| David Gomulya

3

1

Whitman School of Management, Syracuse University, Syracuse, New York

2

Foster School of Business, University of Washington, Seattle, Washington

3

Lee Kong Chian School of Business, Singapore Management University, Singapore

Correspondence

U. David Park, Whitman School of

Management, Syracuse University,

721 University Avenue, Syracuse, NY

13244.

Email: udpark@syr.edu

Abstract

Research Summary:Why do some boards refuse to take

serious action against CEOs who have committed financial

misconduct? Past work has directed attention to the ante-

cedents of misconduct while largely overlooking this ques-

tion. The relatively few studies that examined it have

typically revolved around agency arguments. This study

instead examines how the beliefs and values held by board

members can influence their actions following financial

misconduct. Focusing on political ideology, we argue that

politically conservative boards are more likely to respond

by dismissing the CEO than are liberal boards as the result

of ideo-attribution and threat management tendencies.

Using data from S&P 1500 firms that were involved with

financial misconduct, we find support for our arguments

while addressing sample-induced endogeneity and alterna-

tive explanations with additional analyses.

Managerial Summary:Despite criticism from stake-

holders, the public, media, and policy makers, many firms

do not take serious action against CEOs who have com-

mitted financial misconduct. Past studies have suggested

that this is due to board structures (e.g., lack of board inde-

pendence) or situations surrounding misconduct (e.g.,

severity of misconduct). We propose that political ideol-

ogy, a set of beliefs and values, held by board members,

influences whether firms dismiss their CEOs following

Received: 12 December 2018 Revised: 6 August 2019 Accepted: 6 August 2019 Published on: 9 October 2019

DOI: 10.1002/smj.3088

108 © 2019 John Wiley & Sons, Ltd. Strat. Mgmt. J. 2020;41:108–123.wileyonlinelibrary.com/journal/smj

financial misconduct. Examining S&P 1500 firms that

were involved in financial misconduct, we find that politi-

cally conservative boards tend to dismiss their CEOs more

often than do liberal boards, offering practical implications

for how the ideology of board members can influence criti-

cal actions that they take.

KEYWORDS

CEO dismissal, corporate governance, financial misrepresentation,

organizational misconduct, political ideology

1|INTRODUCTION

Organizational misconduct can pose a significant material threat to organizations, destroying billions

of dollars of market value and resulting in lasting damage to the firm's reputation and credibility

(Devers, Dewett, Mishina, & Belsito, 2009; Greve & Teh, 2016). Firm stakeholders and other

observers generally expect an organization to deliver a strong response to the disclosure of miscon-

duct, and past work has confirmed that organizations sometimes do take strong actions, such as dis-

missing the CEO (Desai, Hogan, & Wilkins, 2006). However, the puzzle is that in many cases

boards have taken limited or no action toward the CEO, even when the misconduct is quite substan-

tial (Beneish, Marshall, & Yang, 2017), resulting in criticism from the public, media, and policy

makers (Economist, 2009; Fisher, 2009) that boards are deficient in their oversight role.

Past work on organizational misconduct has paid close attention as to why misconduct happens

(e.g., Ashforth & Lange, 2016), but, as Palmer, Greenwood, and Smith-Crowe (2016) note, have

paid little attention to the consequences of misconduct (Palmer et al., 2016). The few studies that

have examined the consequences of misconduct have generally centered around two areas. The first

focuses on agency-based explanations such as the role of board independence and the relationship

between CEOs and their directors. For example, Gomulya and Boeker (2016) find that the positive

link between financial restatement and CEO dismissal is influenced by director characteristics while

Nguyen, Hagendorff, and Eshraghi (2016) suggest how the relationship between firm misconduct

and dismissal is affected by board monitoring. The second approach takes a more situational view,

examining how the severity of the misconduct, past firm performance, and media attention (Arthaud-

Day, Certo, Dalton, & Dalton, 2006; Busenbark, Marshall, Miller, & Pfarrer, 2019; Wiersema &

Zhang, 2013; Zavyalova, Pfarrer, Reger, & Hubbard, 2016) influence the relationship between firm

misconduct and CEO dismissal.

Within the broader corporate governance literature, reasons why boards choose to dismiss or pro-

tect CEOs typically revolve around established agency arguments, for example board independence

(e.g., whether a board has more outside directors or an independent Chair) and loyalty to the CEO

(e.g., whether the board member was appointed by the current CEO) (e.g., Crossland & Chen, 2013;

Flickinger, Wrage, Tuschke, & Bresser, 2016). While these studies offer important insights into why

boards vary in their responses to misconduct, we depart from agency-centered or situational explana-

tions to argue that such decisions may be fundamentally shaped by directors' beliefs—how they per-

ceive the misconduct and attribute blame—and what they view to be the correct course of action

following misconduct. As a result, such decisions depend on subjective beliefs of directors. Although

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