Posted on October 19, 2015 by KC Gonzalez
The board of directors oversees the governance of public companies, but how much influence do CEOs have in the nomination process for directors? According to recent research by UTSA accounting faculty member Zhongxia Ye and her colleagues at Kennesaw State University, they found that CEO influence can vary widely.
Zhongxia (Shelly) Ye
Given the need for board member independence, Ye’s research is vital because CEO influence can be associated with adverse governance or accounting outcomes.
“Sarbanes-Oxley requires auditing and other committee members to be independent,” said Ye, whose research focuses on corporate governance and internal controls. “In reality, they may not be.”
Following up on past research that explored board of directors relationships, Ye’s work examined the director nomination process employed by the board of directors nominating committees based on 20 in-depth interviews of U.S. public company nominating committee members.
“The interview process was so important,” said Ye. “Interview-based research provides us with a ‘black box’ of information that is not typically found in research studies.”
The study examined the extent of influence that the CEO had over the committee process; the extent to which the committee process was formalized; and examined the social ties between the interviewees and the CEO.
“What surprised us was that CEOs do have a lot of influence over the process,” said Ye.
The study yielded three findings. First, they found evidence that CEO influence was greater when the potential nominees had more experience serving on the board of directors. Next, they found that CEO influence was greater when retirees served on the nominating committees. Finally, more influence was found for larger companies with greater revenues.
“Based on our findings, we’d encourage auditors to talk with independent board members about the CEO’s role in director nominations, since such influence can impact the internal control process,” said Ye.
In their sample, candidates nominated by the CEO were approved 36 percent of the time. But, they also found that CEO influence over the nominating process has declined over the years.
“This information is rich and can benefit practitioners,” said Ye. “I like to do work that has an impact on practice. And, accounting is the language of business.”
The study, “The Nominating Committee Process: A Qualitative Examination of Board Independence and Formalization,” appeared in Contemporary Accounting Research.
Wendy Frost—
Please send your comments to: wendy.frost@utsa.edu
— KC Gonzalez
