Common Membership and Effective Corporate Governance: Evidence from Audit and Compensation Committees
Article first published online: 18 SEP 2012
© 2012 Blackwell Publishing Ltd
Corporate Governance: An International Review
Volume 21, Issue 1, pages 79–92, January 2013
How to Cite
Liao, C.-H. and Hsu, A. W.-H. (2013), Common Membership and Effective Corporate Governance: Evidence from Audit and Compensation Committees. Corporate Governance: An International Review, 21: 79–92. doi: 10.1111/corg.12000
- Issue published online: 3 JAN 2013
- Article first published online: 18 SEP 2012
- Corporate Governance;
- Audit Committee;
- Compensation Committee;
- Common Membership
This study examines the factors associated with the presence of the same directors across the compensation committee and the audit committee in US firms, and whether such common membership enhances or undermines effective governance.
Using 4,572 firm-year observations in the US during fiscal years 2004–2008, the results show that common membership is more likely to occur in firms with weak corporate governance and in firms lacking financial and committee resources, and is not associated with firms having a high demand for coordination between compensation and audit committees. We also find that firms with common membership have poorer earnings quality and weaker pay-performance sensitivity than other firms.
Our study is one of the first to propose theoretical arguments and empirical evidence on the determinants as well as the consequences of common membership across compensation and audit committees. We fill the gap in the literature by examining the interplay between these committees.
This study offers practical implications for corporations. The findings indicate that common membership is not employed to fulfill the coordinative role between audit and compensation committees and can put the effectiveness of audit and compensation committees at risk. Therefore, firms who intend to strengthen compensation practices or improve financial reporting quality should re-examine their committee structures to ensure proper task separation.