PhD student at Hanken School of Economics, 00101 Helsinki, Finland Stakeholder Controversies in Europe: Reputational Penalties and Career Consequences in the Director Labor Market for Outside Directors NFN, Lund, 14th May, 2018 Niclas O. Meyer PhD student at Hanken School of Economics, 00101 Helsinki, Finland © Hanken Svenska handelshögskolan / Hanken School of Economics, www.hanken.fi

Motivation Firms incur significant penalties following economic misconduct (Karpoff & Lott, 1993; Karpoff, Lee, & Martin, 2008). Financial fraud (Fich & Shivdasani, 2007), earnings restatements (Srinivasan, 2005), and proxy contests (Fos and Tsoutsoura, 2014) lead to reputational penalties for outside directors. Evidence suggest other types of misconduct also costly for firms (Krüger, 2015; Karpoff et al., 2005) Anecdotal examples: Volkswagen Emission Scandal and Deepwater Horizon oil spill. Are directors disciplined following stakeholder controversies/ESG incidents? © Hanken

Research questions Mechanisms that deter fraud: legal penalties (Karpoff & Lott, 1993), personal ethics (Cline et al., 2017; Griffin et al., 2017), market forces and reputation concerns (Karpoff et al., 2008), whistleblowers (Dyck et al., 2010) and monitoring by directors (Malm & Mobbs, 2014). Fama and Jensen (1983) suggest directors have reputational incentives to monitor. Directors may step down from a board prior to bad events to protect their reputation (Fahlenbrach et al., 2017). H1: Are directors disciplined following stakeholder controversies? H2: Do penalties depend on severity of (ESG) risk exposure? H3: Do penalties depend on a country’s stakeholder/shareholder-orientation? © Hanken

Data RepRisk: screens >80,000 media, stakeholder, and third-party sources every day in 15 different languages for incidents related to 28 different ESG issues. Data: 2007 – 2015 on a monthly basis; EuroStoxx 600 firms. BoardEx for director-specific data. Compustat & Thomson Reuters Eikon for company-specific data. Thomson Reuters News Monitor for event study. © Hanken

Research design Firm value: Stock market reactions at controversial firms 2007-2015 (Event study: n = 123) Abnormal operating performance 2007-2015 (Barber & Lyon, 1996: n = 163) Director reputation 2007-2014 (track directors 2006 – 2016): Matched firms: 90-110% ROA(t-1), 70-130% total assets(t-1), and SIC codes. 142 high/very high/extremely high risk exposure firms and 142 matched. 2,868 supervisory directors of which 1,684 are independent directors. 1,560 SDs and 1,091 independent directors at least one other seat at time t. (1) ∆ 𝑂𝑡ℎ𝑒𝑟 𝑑𝑖𝑟𝑒𝑐𝑡𝑜𝑟𝑠ℎ𝑖𝑝𝑠 𝑑𝑖𝑡 = 𝛽 0 + 𝛽 1 ∗𝑃𝑒𝑎𝑘𝑅𝑅 𝐼 𝑖𝑡 + 𝛾 1, 𝑑𝑖𝑡 ∗𝐶𝑜𝑛𝑡𝑟𝑜𝑙 𝑠 𝑑𝑖𝑟𝑒𝑐𝑡𝑜𝑟 + 𝛾 2, 𝑖𝑡 ∗𝐶𝑜𝑛𝑡𝑟𝑜𝑙 𝑠 𝑓𝑖𝑟𝑚 + 𝛿 𝑡 + 𝛿 𝐼𝑛𝑑 + 𝛿 𝐶𝑜𝑢𝑛𝑡𝑟𝑦 +𝜀 (2) ∆ 𝑂𝑡ℎ𝑒𝑟 𝑑𝑖𝑟𝑒𝑐𝑡𝑜𝑟𝑠ℎ𝑖𝑝𝑠 𝑑𝑖𝑡 = 𝛽 0 + 𝛽 1 ∗𝑀𝑒𝑑𝑖𝑎 𝑎𝑡𝑡𝑒𝑛𝑡𝑖𝑜 𝑛 𝑖𝑡 /𝐶𝐴 𝑅 𝑖𝑡 + 𝛾 1, 𝑑𝑖𝑡 ∗𝐶𝑜𝑛𝑡𝑟𝑜𝑙 𝑠 𝑑𝑖𝑟𝑒𝑐𝑡𝑜𝑟 + 𝛾 2, 𝑖𝑡 ∗𝐶𝑜𝑛𝑡𝑟𝑜𝑙 𝑠 𝑓𝑖𝑟𝑚 + 𝛿 𝑡 + 𝛿 𝐼𝑛𝑑 +𝜀 © Hanken

Univariate results Are stakeholder controversies costly for firms? Director reputation: © Hanken

−0.00259∗50=−0.13 other seats, ceteris paribus Multivariate results −0.00259∗50=−0.13 other seats, ceteris paribus −0.00397∗50=−0.20 −0.00455∗50=−0.23 −0.00756∗50= −0.38 © Hanken

Multivariate results Valuation effects versus media attention © Hanken

Shareholder versus stakeholder-orientation Legal origin correlated with shareholder protection (La Porta et al., 1998). Firms in stakeholder-oriented countries expected to carry broader duty towards society (Bénabou and Tirole, 2010). Three groups: (1) English common-law (most shareholder-oriented) (2) German and Scandinavian civil-law (most stakeholder-oriented) (3) French civil-law (in the middle). Djankov et al. (2008) construct anti-self-dealing index. My sample: English common-law: 0.94. German civil-law: 0.31. French civil-law: 0.36. © Hanken

Multivariate results Valuation effects versus media attention © Hanken

Conclusions Stakeholder controversies: Costly for firms and lead to penalties to directors. Higher risk exposure lead to more severe director penalties. Short-term: independent directors’ reputations affected by degree of investor reaction whereas supervisory directors’ also by media attention. Shareholder versus stakeholder-orientation: Find no differences in director penalties between legal origins. Short-term: English legal origin and French legal origin: CARs. German legal origin: CARs and Media Attention. © Hanken