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Conflicting Objectives within the Board: Evidence from Overlapping Audit and Compensation Committee Members

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  • Udi Hoitash

    (Northeastern University)

  • Rani Hoitash

    (Bentley College)

Abstract

The board of directors is an elite group that faces multifaceted tasks. The board needs to implement decisions on a wide variety of subject matter. These decisions are often delegated to specialized sub-committees within the board. The different objectives of each sub-committee can result in conflicting interests leading to decisions that are sub-optimal. For example, at times, the objectives of the compensation and the audit committee are not aligned. The objective of compensation committees is to grant CEOs compensation packages reflective of their performance. Yet, these compensation packages might contain incentives that could motivate CEOs to influence the financial reporting process in order to reflect better performance, increasing the risk of poor quality financials. In contrast, the objective of audit committees is to oversee the quality of the financial reports and the process that leads to them. Therefore, they would favor compensation packages that reduce the risk of earnings manipulation. We examine public companies that have overlapping compensation and audit committee members and find a higher proportion of CEO incentive compensation in companies with less overlap among audit and compensation committee members. These results suggest that separating the members within these committees might contribute to the effectiveness of board decisions.

Suggested Citation

  • Udi Hoitash & Rani Hoitash, 2009. "Conflicting Objectives within the Board: Evidence from Overlapping Audit and Compensation Committee Members," Group Decision and Negotiation, Springer, vol. 18(1), pages 57-73, January.
    • Handle: RePEc:spr:grdene:v:18:y:2009:i:1:d:10.1007_s10726-008-9125-y
    DOI: 10.1007/s10726-008-9125-y
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    References listed on IDEAS

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    Cited by:

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    4. Redhwan Al‐Dhamari & Abdulsalam Saad Alquhaif & Bakr Ali Al‐Gamrh, 2022. "Modelling the impact of audit/remuneration committee overlap on debtholders' perceptions of accounting information quality: The role of CEO power," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 27(3), pages 2898-2920, July.
    5. Yuanto Kusnadi & Kwong Sin Leong & Themin Suwardy & Jiwei Wang, 2016. "Audit Committees and Financial Reporting Quality in Singapore," Journal of Business Ethics, Springer, vol. 139(1), pages 197-214, November.
    6. Ding, Bin Yan & Wei, Feng, 2023. "Overlapping membership between risk management committee and audit committee and bank risk-taking: Evidence from China," International Review of Financial Analysis, Elsevier, vol. 86(C).
    7. Mary Ellen Carter & Luann J. Lynch & Melissa A. Martin, 2022. "Board Committee Overlap and the Use of Earnings in CEO Compensation Contracts," Management Science, INFORMS, vol. 68(8), pages 6268-6297, August.
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    9. Tao, Ngoc Bich & Hutchinson, Marion, 2013. "Corporate governance and risk management: The role of risk management and compensation committees," Journal of Contemporary Accounting and Economics, Elsevier, vol. 9(1), pages 83-99.

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