. Recent corporate scandals have focused the attention of a broad set of constituencies on reforming corporate governance. Boards of directors play a leading role in corporate governance and any significant reforms must encompass their role. To date, most reform proposals have targeted the legal, rather than the ethical obligations of directors. Legal reforms without proper attention to ethical obligations will likely prove ineffectual. The ethical role of directors is critical. Directors have overall responsibility for the ethics and compliance programs (...) of the corporation. The tone at the top that they set by example and action is central to the overall ethical environment of their firms. This role is reinforced by their legal responsibilities to provide oversight of the financial performance of the firm. Underlying this analysis is the critical assumption that ethical behavior, especially on the part of corporate leaders, leads to the best long-term interests of the corporation. We describe key components of a framework for a code of ethics for corporate boards and individual directors. The proposed code framework is based on six universal core ethical values: (1) honesty; (2) integrity; (3) loyalty; (4) responsibility; (5) fairness; and (6) citizenship. The paper concludes by suggesting critical issues that need to be dealt with in firm-based codes of ethics for directors. (shrink)

The unethical behavior of a business founder often leads to negative publicity which substantially affects positive corporate image. The amount of negative publicity relating to business founders’ unethical behavior is on the rise in the age of online social media in China. Based on the stimulus–response theory and balance theory, this paper developed a theoretical model to examine how negative publicity about a business founder’s unethical behavior affects corporate image. The proposed model was tested by the partial least squares technique. (...) Results show that perceived severity, publicity intensity and recovery performance are predictors of corporate image: perceived severity has a negative impact on positive corporate image; publicity intensity and recovery performance have positive impacts on positive corporate image; and founder image mediates the relationships between the three predictors and corporate image. Moreover, initial consumer impression of business founders has a positive impact on positive corporate image. (shrink)

Although business ethics has a long history as a core theme within the realm of strategic management it has not received considerable attention in top strategy journals until recently. In this paper, we assess the state of business ethics research published over a 5-year period (2006–2010) in Strategic Management Journal to ascertain whether there has been an increase in business ethics research published in the top strategy outlet. The results of our content analysis reveal that ethics research in SMJ is (...) indeed on the rise yet this research stream is still underrepresented with only 5.8 % of all articles published over the five-year period having an ethics theme. Moreover, the link between Corporate Social Performance and Financial Performance was identified as the top theme during the review period. (shrink)

This paper discusses internal dynamics of the firm that contribute to the failure of knowledge conditions, using the Enron scandal as a case study. Ability of the board to effectively monitor conduct at operational levels includes various dynamics: senior management being isolated from those at operational levels; individuals pursuing subgoals that are contrary to overall corporate goals; information flow along a narrow linear channel that effectively forecloses adverse information from getting to senior management; a corporate culture of intimidation, discouraging open (...) expressions of doubt or skepticism, resulting in reluctance to challenge senior officials, and pushing the limits of ethics and the law.Elements of information blockage in the corporation include: the "law of diminishing control"; deliberate concealment of information by officers; motivation to report to the boss what one perceives the boss wants to hear; theory of "bounded rationality" that explains surprising role of irrationality in decisionmaking – unconscious emotions and motivations. Discussion of behavioralist studies of cognitive dissonance, belief perseverance, confirmatory bias, entity effect, motivated reasoning, group cohesion or "groupthink," and the false consensus effect. Problem of overoptimism – tendency of many people to overrate their own abilities, contributions and talents – and tendency toward puffery and dismissal of risks in formulating disclosures and press releases. (shrink)

In the slipstream of several large-scale corporate scandals, the board of directors has gained a pivotal position in the corporate governance debate. However, due to an overreliance on particular methodological (i.e. input–output studies) and theoretical (i.e. agency theory) research fortresses in past board research, academic knowledge concerning how this important governance mechanism actually operates and functions remains relatively limited. This theoretical paper aims to contribute to the promising stream of research which focuses on behavioural perspectives and processes within the corporate (...) board, by delving into one of the research areas perhaps plagued most by these predominant approaches: board leadership. In adopting a team perspective on the board of directors our study goes beyond traditional board leadership research, which has turned a blind eye on actual leadership dynamics, by examining leadership processes and behaviours inside the board team. Specifically, we develop a conceptual framework addressing a novel and ethical approach to team leadership within the board, i.e. shared leadership, which has previously been demonstrated to result in performance benefits in various other team settings. (shrink)

This article examines the impact of the prevailing state ownership in the Chinese stock market on corporate governance and the financial regulatory system, respectively, as the internal and external monitoring mechanisms to deter corporate fraud and protect investors. In line with the literature that state ownership exaggerates the agency problem, we find that the retained state ownership in privatised firms increases the incidence of regulatory enforcements against fraud. For the state-owned enterprises (SOEs), however, larger state ownership is associated with a (...) lower incidence of enforcement actions. This is attributed to the mutual political affiliation of the fraudulent SOEs and the regulatory commission. A new regulation "Solutions for Listed Firm Checks" promulgated in March 2001 has mitigated this effect by empowering the regulatory commission to increase the severity of regulatory conditions. Our evidence confirms the improvement in the regulatory environment and investor protection in the Chinese stock market brought about by the regulatory reform and development. (shrink)

In this article, I address the question of the apportionment of the consequences of organizational misconduct to individual members of the organizational elite. I argue that this process can be best understood by marrying the behavioral aspects of stigma theory to the economic mechanisms of ex post settling up. Viewed in conjunction with stigmatization, ex post settling up following organizational misconduct can be seen as the result of attempts to avoid stigma by association. Efforts at stigma avoidance on the parts (...) of various stakeholders produce the diminished social interaction associated with ex post settling up: departure from the focal firm, and loss of seats on other boards. This also suggests that the process of stigmatization, and hence ex post settling up, can be influenced by characteristics of social interaction unrelated to the misconduct itself. (shrink)

The rising tide of corporate scandals and audit failures has shocked the public, and the integrity of auditors is being increasingly questioned. It is crucial for auditors and regulators to understand the main causes of audit failure and devise preventive measures accordingly. This study analyzes enforcement actions issued by the China Securities Regulatory Commission against auditors in respect of fraudulent financial reporting committed by listed companies in China. We find that auditors are more likely to be sanctioned by the regulators (...) for failing to detect and report material misstatement frauds rather than disclosure frauds. Further analysis of the material misstatements indicates that auditors are more likely to be sanctioned for failing to detect and report revenue-related frauds rather than assets-related frauds. In sum, our results suggest that regulators believe auditors have the responsibility to detect and report frauds that are egregious, transaction-based, and related to accounting earnings. The results contribute to our knowledge of auditors’ responsibilities for detecting frauds as perceived by regulators. (shrink)

This study investigates the impact of fraud/lawsuit revelation on U.S. top executive turnover and compensation. It also examines potential explanatory variables affecting the executive turnover and compensation among U.S. fraud/lawsuit firms. Four important findings are documented. First, there was significantly higher executive turnover among U.S. firms with fraud/lawsuit revelation in the Wall Street Journal than matched firms without such revelation. Second, although on average, U.S. top executives received an increase in cash compensation after fraud/lawsuit revelation, this increase is smaller than (...) that of matched non-fraud/lawsuit firms. Third, fraud/lawsuit firms were more likely to change top executive when chief executive officer (CEO) was not the board chairman and CEO had been on the board for a short time. Fourth, fraud/lawsuit firms were more likely to reduce their executive cash compensation when profitability was low, firms were involved in fraud, the compensation committee size was small, and the board met more often. These findings indicate that although, in general, U.S. fraud/lawsuits firms did not reduce their executive cash compensation, those involved in fraud were more likely to reduce their executive cash compensation than to change their top executives. The finding, that ethical standards is not a significant factor for U.S. executive turnover nor compensation reduction, suggests that ethics appears to play no part in the board’s decisions, and that U.S. firms may have ethical standards in writing but they do not implement nor enforce the standards. (shrink)