From time to time, we highlight current research conducted by Accounting Faculty and its real world impact on business.
CFO Magazine and
CIO Magazine published a story asking the basic question, “Should CFOs Get on-Board?” The articles where based on Professor Udi Hoitash and his colleagues’ recent research where they examined this question and the resultant benefits and costs.
Following the Sarbanes-Oxley act, the presence of C-Level officers on the board has been significantly reduced. The act and previous academic research proclaimed that insiders on the board of directors, which reduces board independence, could hinder the ability of the board to perform its fiduciary duties. For example, Professor Hoitash notes that many prior studies find that insiders on the board are associated with greater SEC enforcement actions and lower quality earnings. Yet, prior research has treated insiders as one group assuming similarities within the group. However, CFO’s specialized role and knowledge in the financial reporting function set the CFO apart from other insiders. Because of his unique role and knowledge, CFO membership on the board counteracts previously found negative effects. Hoitash and his colleagues find that companies with the CFO on the board have higher financial reporting quality, which materializes with fewer material internal control weaknesses, fewer financial statement restatements, and higher earnings quality. The CFO and the other board members develop stronger working relationships, increasing the trust between the parties, resulting in mutual advice and collaboration.
Yet, some costs of appointing the CFO to the board are also apparent. Specifically, CFOs with a board seat have higher compensation and lower likelihood of termination, signaling greater entrenchment. Thus, companies need to weigh the benefits as well as the costs before appointing the CFO to the board.
The complete
CFO magazine article
can be found here. A complete version of Professor’s Hoitash’s research paper
can be found here.