Clubby ties between U.S. CEOs and board audit committees: study

NEW YORK Tue Dec 10, 2013 5:58pm EST

Financial Chief Executives wait to speak to the media at the White House after a meeting about the economy with U.S. President Barack Obama in the State Dining Room in Washington, March 27, 2009. REUTERS/Larry Downing

Financial Chief Executives wait to speak to the media at the White House after a meeting about the economy with U.S. President Barack Obama in the State Dining Room in Washington, March 27, 2009.

Credit: Reuters/Larry Downing

NEW YORK (Reuters) - Almost 40 percent of U.S. corporate directors with responsibility for monitoring the profit-and-loss ledger have social ties to the chief executive, a study says, making them look more like lapdogs than watchdogs.

Conducted by two accounting professors at Tilburg University in The Netherlands, the study reinforces long-held perceptions of a clubby culture on U.S. corporate boards, where members seldom challenge the executives they are meant to police.

The study looked at about 2,000 U.S. companies and their board audit committees, which are responsible for overseeing outside auditors and making sure financial reports are accurate. It found that personal friends of senior managers were often appointed to these committees, making the directors more likely to go along with the company's reporting practices.

Where that was the case, earnings manipulation was more frequent and problems such as weak financial controls were covered up, the study found.

Regulations put in place over a decade ago after accounting scandals at Enron and WorldCom required audit committees to be made up only of independent directors. That meant they were never employed by the company or a firm doing business with it.

Even so, audit committee members often have long-standing social ties to executives, belonging to the same elite clubs or charity boards, the study found.

"Although such firms appear to have independent audit committees, in reality these committees offer little to no monitoring at all," the study found.

The study, by accounting professors Liesbeth Bruynseels and Eddy Cardinaels, researched social ties with BoardEx, a business intelligence service. It appears in the January 2014 issue of the American Accounting Association's Accounting Review.

The professors suggested that legislators consider requiring more disclosure about social connections between audit committees and CEOs, given the committees' importance.

Charles Elson, director of the Weinberg Center for Corporate Governance in Newark, Delaware, said it would be difficult for regulators to define social ties.

"Is it one lunch a week, is it two lunches? Inevitably, social ties will develop when you're on a board - you have to see that person on a regular basis," he said.

The United States made a major push to improve audit committees' effectiveness with the passage of the 2002 Sarbanes-Oxley Act, which tightened membership requirements.

More recently, regulators in Europe and the United Kingdom have been trying to get audit committees to be more rigorous in choosing outside auditors and monitoring them.

(Additional reporting by Huw Jones in London; Editing by Kevin Drawbaugh and Dan Grebler)

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Comments (1)
gg14 wrote:
Business is about relationships. A Board’s & Audit Committee’s job is to oversee and provide governance. It’s the CEO’s duty to manage the company and have good financial controls. Just because some Board members have social relationships with management does not necessarily mean that the Audit Committee members do not monitor or will “look the other way”. A good Company has a Board whose members serve as advisors to the CEO, and a good CEO seeks out that advice and listens to it. A good relationship between the CEO & the Board/Audit Committee is often part of a successful company. When there is a bad outcome, it is also (and arguably, primarily) the CEO’s fault that the problem existed in the first place. Secondarily, there may have been poor oversight by the Board/Audit Committee. How often the CEO & the Board members saw each other socially is not the problem. Requiring disclosures that create adversity between the Company & its Board is not going to increase communication and solve the original problem in such scenarios…a CEO who made a bad decision or allowed bad management decisions, may not been transparent with the Board, etc. The study seems to oversimplify the complexity of problems that often are involved in such situations.

Dec 15, 2013 11:40am EST  --  Report as abuse
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