Among corporations involved in the 2006 stock-option backdating scandal, those implicated earlier were more likely to dismiss their top executives than those that surfaced later on, according to new research from Rice University and the University of California at Irvine.
The study, "Executive Turnover in the Stock-Option Backdating Wave: The Impact of Social Context," will be published in an upcoming edition of the Strategic Management Journal.
The researchers examined the behavior of corporate boards following the 2006 stock-option backdating scandal, in which firms illegally manipulated stock-option grant dates. Researchers reviewed the 141 companies listed as having come under scrutiny for their stock-option practices in the Wall Street Journal Options Scorecard website to understand why corporations respond to the same kind of misconduct in different ways.
"When faced with scandal, it's critical for corporations to manage their images and maintain legitimacy with stakeholders and the general public," said Anthea Zhang, professor of strategic management at Rice University's Jones Graduate School of Business. "While it seems to be a natural choice to fire the executives/directors who should be responsible for option backdating, only one-third of the 141 firms we surveyed elected to do so."
Zhang and her co-author, Margarethe Wiersema at the University of California at Irvine, theorize that the decrease in executive/director turnover over the course of the scandal can be attributed to companies using other companies' similar misconduct to justify their own misconduct.
"Our findings suggest that corporate boards 'strategize' their response by calculating the reputation damage caused by scandal," Zhang said. "If accountability were the basis for their decision-making, we should have observed a more consistent pattern of companies choosing to dismiss their executives/directors over time."
Zhang said that attention from the media, as well as investigation by the Department of Justice and/or the Securities and Exchange Commission, plays an important role in pushing companies involved in the scandal to fire their executives and directors.
"This attention serves to counterbalance corporation boards' tendency to justify their misbehavior with others' misbehavior," she said.
Zhang hopes their research can help stakeholders and the general public better understand how corporate boards respond to scandal.
The study was funded by Rice University and the University of California at Irvine.
Related links:
Anthea Zhang bio: http://business.rice.edu/OnlineDirectory/PersonnelDetail.aspx?id=3411
Jesse H. Jones Graduate School of Business: http://business.rice.edu
Rice University has a VideoLink ReadyCam TV interview studio. ReadyCam is capable of transmitting broadcast-quality standard-definition and high-definition video directly to all news media organizations around the world 24/7. To schedule an interview with Zhang or to obtain a copy of the study, contact David Ruth, director of national media relations at Rice, at druth@rice.edu or 713-348-6327.
Located on a 300-acre forested campus in Houston, Rice University is consistently ranked among the nation's top 20 universities by U.S. News & World Report. Rice has highly respected schools of Architecture, Business, Continuing Studies, Engineering, Humanities, Music, Natural Sciences and Social Sciences and is known for its "unconventional wisdom." With 3,708 undergraduates and 2,374 graduate students, Rice's undergraduate student-to-faculty ratio is less than 6-to-1. Its residential college system builds close-knit communities and lifelong friendships, just one reason why Rice has been ranked No. 1 for best quality of life multiple times by the Princeton Review and No. 4 for "best value" among private universities by Kiplinger's Personal Finance. To read "What they're saying about Rice," go to www.rice.edu/nationalmedia/Rice.pdf.
Journal
Strategic Management Journal