Corporate boards that monitor their companies intensely engage in more effective oversight: Turnover of their CEOs is more closely linked to annual firm performance; CEO compensation is less often excessive; and earnings management is rarer. However, such boards are also associated with being lax in advising management and, as a result, the net impact of their intense monitoring on firm value is negative (e.g., Faleye, Hoitash, and Hoitash, 2011). More broadly, intense board monitoring destroys trust and hampers communication between the chief executive officer (CEO) and the independent directors and reduces the amount of strategic information that the directors receive from management. Much of this friction relates to CEOs’ concerns about their job security and independent directors’ concerns about their reputations (e.g., Longenecker et al., 2004; Song and Thakor, 2006).
Suppose there were an attribute to independent directors that could alter their approach to intense board monitoring. In that case, it would become pertinent to explore whether such an attribute could lead to a change in perspective that might, in turn, ease the CEO-versus-independent-directors friction and, potentially, allow the expected benefits of intense board monitoring to accrue to the firm.
We take up this search in our new paper, Religiosity, Higher Purpose, and the Effectiveness of Intense Board Oversight. We focus on how the personal religiosity (or sense of higher purpose) of independent directors affects the effectiveness of their intense board oversight.
Religiosity and the pursuit of organizational higher purpose exhibit some fundamental parallels: Both relate to beliefs in something bigger than oneself or the pursuit of objectives that are far bigger than the rudimentary existential goals of an entity. Instilling them in individuals who serve an organization or in the organization itself can lead to pro-social behavior and transformational outcomes (e.g., Lehrer and Chiswick, 1993; Thakor and Quinn, 2020).
Compared with their non-religious counterparts, religious individuals report a higher sense of purpose, according to the literature. Several anecdotes suggest compelling links between founders’ and leaders’ senses of higher purpose and the pursuits of higher purpose in the organizations they lead. In a recent survey of over 1,000 individuals, Bunderson and Thakor (2020) find a positive correlation between individual and organizational higher purpose. Also, economic theories of moral behavior and identity suggest that people care about who they are and draw their values and preferences from past choices (e.g., Benabou and Tirole, 2011), and that identity – a person’s sense of self – affects how he or she interacts with others (e.g., Akerlof and Kranton, 2000). Multiple religious scriptures (Christian and non-Christian) identify and teach forbearance or patience as a vital tenet of the adherents’ religiosities. Thakor and Quinn (2020), in their “higher purpose, incentives, and economic performance” theory, suggest, among several results, that the adoption of a longer-term perspective and the delegated exercise of pro-social behavior are close to what they had in mind with the pursuit of higher purpose.
Therefore, pursuant to our main research goal, we develop a novel two-dimensional measure to sort the monitoring-intensive directors into religious and non-religious counterparts. Nevertheless, to activate our novel measure, we needed a proxy for the independent directors’ religiosity. Fortunately, the religious affiliation of the undergraduate academic institutions attended had already been used in the literature as a proxy for personal religiosity (e.g., Cai, et al., 2019). Yet, we observe that (i) most directors who hold a graduate degree in divinity are also religious leaders and (ii) many religious-affiliated graduate business and law schools vow to infuse their programs with religiosity. Hence, we augment our proxy for the independent directors’ religiosity to include the latter two cases.
Our augmentation of this proxy is suitable for our empirical analyses for a couple of reasons: (a) the affiliation of educational institutions with religious organizations will tend to shift the typical relationship between education and religiosity from substitution (e.g., Sacerdote and Glaser, 2008) to complementarity and (b) the array of noise embedded in our proxy actually works against our finding any statistically significant effects. Nevertheless, we find the following.
Religious directors or directors with a higher sense of purpose hold a longer-term perspective on CEO performance evaluation: Compared with their non-religious counterparts, religious monitoring-intensive directors are significantly less likely to change their company’s CEO based on the company’s performance over a period of one year. However, for the more extended period of 2 years, this difference in likelihood of CEO turnover significantly switches direction, consistent with the “higher purpose, incentives, and economic performance” theory by Thakor and Quinn (2020), suggesting that believers in higher purpose will tend to hold a longer-term perspective.
Religious directors or directors with a higher sense of purpose also improve the typical benefits of intense board oversight, especially when they have more power and influence on the board: We also find that religious monitoring-intensive directors further reduce earnings management, on average, all else being equal. Similar evidence that they tend to reduce excess total CEO compensation further, though ordinarily not as strong, becomes highly significant when the lead independent director or a majority of the principal monitoring committee chairs are also religious, consistent with Wabara (2021).
Independent directors’ religiosity or sense of higher purpose seems to matter more than that of CEOs for firms’ earnings quality: We also find that the monitoring-intensive directors’ religiosity is more economically significant than the CEOs’ for the quality of the earnings information in firms’ financial reports.
Boards do not appear to easily “pull the trigger” on CEOs above a certain underperformance threshold: We further find that the differences in average sensitivities of CEO turnover to firm performance do not take effect, statistically, until individual firm performances worsen beyond -5 percent relative to the market, at the minimum. This result is unchanged either for monitoring-intensive versus non-monitoring-intensive boards or for religious monitoring-intensive versus non-religious monitoring-intensive boards.
Finally, we exploit our novel measure’s multi-dimensionality to rule out the potential selection story that our results might be associated with ethical firms (known in the literature to have a high level of business integrity). Overall, our results show that religious monitoring-intensive directors differentially influence intense board oversight results and can help infuse or propagate a corporate culture consistent with an authentic organizational higher purpose (e.g., Thakor and Quinn, 2020).
Akerlof, George, and Rachel E. Kranton, “Economics and Identity,” Quarterly Journal of Economics 15-3, August 2000, pp. 715-753
Bénabou, Roland and Jean Tirole, “Identity, Morals, and Taboos: Beliefs as Assets” Quarterly Journal of Economics 126(2), 2011, pp. 805-855.
Bunderson, S. and Thakor, A. V. 2020. Personal and organizational higher purpose: survey results, Working paper
Cai, Y., Kim, Y., Li, S., Pan, C., 2019. Tone at the Top: CEOs’ Religious Beliefs and Earnings Management, Journal of Banking and Finance 106, 195–213
Faleye, O., Hoitash, R., Hoitash, U., 2011. The Costs of Intense Board Monitoring, Journal of Financial Economics 101, 160–181.
Lehrer, E. L, 2004. Religion as a determinant of economic and demographic behavior in the United States. Popul. Dev. Rev. 30 (4), 707–726.
Longenecker, J. G., McKinney, J. , Moore, C., 2004. Religious intensity, evangelical Christianity, and business ethics: an empirical study. J. Bus. Ethics 55 (4), 373–386.
Sacerdote, B., and Glaser, E. L., 2008. Education and Religion, Journal of Human Capital. 2008 vol. 2(2), pages 188-215
Song, F., and Thakor, A. V. 2006. Information Control, Career Concerns, and Corporate Governance, Journal of Finance
Thakor, A. V. and Quinn, R. E.. 2020. Higher purpose, incentives, and economic performance ECGI working paper, available here
Wabara, K., 2021. How many female seats on a board? Group gender-diversification, power, risk-taking, and financial performance, available here
This post comes to us from Professor Todd T. Milbourn and Kingsley Wabara, a PhD candidate in finance, at Washington University in St. Louis’ Olin Business School. It is based on their recent paper, “Religiosity, Higher Purpose, and the Effectiveness of Intense Board Oversight,” available here.