oes the emphasis on not appointing to an audit committee corporate board directors who have significant relationships to a company obscure consideration of other characteristics that also may be important? Independence aside, a director’s ability and willingness to perform well may ride on whether he or she has equity investments in a company, holds other
directorships, sits on additional committees or is a “seasoned” player. To determine how these factors influenced the selection of directors from among outside candidates, I compared 262 directors appointed to audit committees of public companies between 1995 and 1998 to a control group of the same number of directors selected for other committees.
The comparison showed that a director’s share ownership in the company, measured in terms of its market value, was unrelated to the likelihood of audit committee appointment. Predictions of the effect of this factor on appointments had been mixed: Some had held that directors who owned stock would be more likely to protect shareholders’ interests. Others proposed too much equity might give directors an incentive to turn a blind eye to management’s manipulation of earnings—in their favor. Surprisingly, directorship experience in other companies, a trait likely to enhance performance, also was not related to the chances of appointment. Unlike their counterparts, audit committee directors, for the most part, had served on significantly fewer other committees and for a shorter period of time on the corporate board, which implied they were mere “babes in the woods.” Perhaps company board members viewed the audit committee as a training ground for those newly appointed to the board or as less important than other committees.
The research results suggested that, given the emphasis on independence of audit committee members, corporate boards actually might be overlooking other important attributes in appointing directors, and policymakers should consider these in setting guidelines for such appointments.
For the full text of the research paper, see “On Audit Committee Appointments,” Auditing: A Journal of Practice & Theory, March 2001, vol. 20, no. 1.
NIKOS VAFEAS, PhD, is associate professor of accounting, University of Cyprus, Nicosia. His e-mail address is email@example.com .