Stepping across for social approval: Ties to independent foundations' boards after financial restatement

• DOI: http://doi.org/10.1002/smj.2754
• Published date: 01 April 2018
• Date: 01 April 2018
• Author: Wenpin Tsai,Razvan Lungeanu,Srikanth Paruchuri

RESEARCH ARTICLE

Stepping across for social approval: Ties to

independent foundations’boards after financial

restatement

Razvan Lungeanu | Srikanth Paruchuri | Wenpin Tsai

Management & Organization Department, Smeal

College of Business, The Pennsylvania State

University, University Park, Pennsylvania

Correspondence

Razvan Lungeanu, Management & Organization

Department, Smeal College of Business, The

Pennsylvania State University, University Park,

PA.

Email: r-lungeanu@psu.edu

Funding information

Center for Family Enterprises, Kellogg School of

Management

Research Summary:Integrating research on independent

philanthropy and organizational misconduct, we argue

that affiliations with independent foundations provide

social approval benefits for firms that restate their finan-

cials. We use a panel of S&P 500 companies from 2004

to 2011 to investigate the addition of foundation board

ties by restating firms. CEOs of restating firms add more

new foundation board ties than CEOs of non-restating

firms, while existing corporate philanthropy and greater

corporate reputation diminish this effect. We also find

that new ties to foundations boards influences media

tenor for restating firms more than it does for non-

restating peers. Our study offers a nuanced analysis of the

post-crisis actions of restating firms relative to non-

restating peers and highlights the relevance of ties to non-

profit boards for corporate governance.

Managerial Summary:Firms oftentimes fire their top

executives in the aftermath of misconduct, but such

response is itself disruptive for the firm’s operations.

Instead, we suggest that forging ties to independent foun-

dations can help firms in such contexts without unsettling

effects. Our results show that, after a restatement event,

CEOs of misconduct firms are especially likely to join

new foundation boards as trustees and thus seem to be

aware of the benefits of these associations. CEOs from

firms with existing in-house philanthropy or a high repu-

tation do not join as many new foundations’boards of

trustees. We also find that new firm-foundation links are

promptly and positively evaluated by the media, thus

helping misconduct firms regain social approval.

Received: 14 June 2016 Revised: 25 October 2017 Accepted: 27 November 2017 Published on: 30 January 2018

DOI: 10.1002/smj.2754

Strat Mgmt J. 2018;39:1163–1187. wileyonlinelibrary.com/journal/smj Copyright © 2017 John Wiley & Sons, Ltd. 1163

KEYWORDS

boards, misconduct, philanthropy, restatements, social

approval

1|INTRODUCTION

Firms that restate their financials (i.e., “restating firms”) are generally perceived to have engaged in

misconduct (e.g., Foreman, Whetten, & Mackey, 2012; Greve, Palmer, & Pozner, 2010), resulting

in a loss of “social approval”(i.e., acceptance or positive sentiment of broadly defined stakeholders

including the general public) (see, for example Bundy & Pfarrer, 2015; Zavyalova, Pfarrer, Reger, &

Shapiro, 2012). Prior research has discussed how firms could recover or regain social approval after

a transgression (Bachmann, Gillespie, & Priem, 2015; Pfarrer, Decelles, Smith, & Taylor, 2008;

Poppo & Schepker, 2010) and also investigated empirically a variety of recovery actions such as

executive turnover (Arthaud-Day, Certo, Dalton, & Dalton, 2006), press releases (Chakravarthy,

DeHaan, & Rajgopal, 2014), and denial and defense (Lamin & Zaheer, 2012), among other

responses (Pace, Fediuk, & Botero, 2010; Pfarrer, Decelles, et al., 2008).

Here, we investigate the use and effectiveness of a distinct, less disruptive way for restating

firms to recover from social approval loss. Specifically, building on research on spillover effects

through ties to highly reputable or legitimate actors (Baum & Oliver, 1991; Galaskiewicz, 1985), we

consider the ties formed by CEOs of restating firms to the boards of independent philanthropic foun-

dations, the latter representing organizations imbued with high moral image and social approval.

Given that a firm’s CEO is regarded in both practice and research to represent the company, we

frame our questions as follows: Do restating firms add more ties to foundations’boards in the post-

restatement period? If so, are such new ties effective in recovering social approval?

We start our investigation by comparing the addition of ties to independent foundations’boards

by restating firms post-restatement with those added by non-restating firms in the same period. We

also seek to identify which restating firms are more likely to add foundation ties. Specifically, we

focus on how a firm’s initial reputational endowment, conceptualized in two different ways as cor-

porate philanthropy and corporate reputation, may moderate the influence of financial misconduct

on the number of new ties to foundations’boards post-restatement. Finally, we examine whether

creating such new ties is an effective strategy to gain social approval, by testing its effects on media

tenor.

Using a panel of S&P 500 companies from 2004 to 2011, our study offers a nuanced analysis of

the post-crisis actions of restating firms relative to non-restating peers, and opens rich avenues for

research across corporate misconduct and corporate governance domains. By examining how restat-

ing firms recover social approval through new ties to independent foundations, our study is among

the few to consider restating firms’actions beyond executive turnover and press releases (see

e.g., Arthaud-Day et al., 2006; Chakravarthy et al., 2014), as well as the first to test the effectiveness

of adding new ties to foundations’boards. We also contribute to an understanding of ties between

for-profit corporations and independent philanthropic foundations. Independent foundations repre-

sent a distinct institutional field (Prewitt, 2006). However, despite seminal earlier work by Useem

(1980) and Galaskiewicz (1985) on the association between corporate elites and independent

1164 LUNGEANU ET AL.