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1. Introduction We investigate whether involvement of the chief executive officer (CEO) in selecting board members reduces audit committee effectiveness. A decade ago, studies found CEO influence reflected in appointments to full boards and audit committees of inside and grey directors: directors who are employees or have business and family connections to the company and its officers ( Klein 1998 ; Shivdasani and Yermack 1999 ). However, listing standards adopted subsequent to the 1999 Blue Ribbon Committee Report limited the ability of inside and grey directors to meet independence criteria, and the 2002 Sarbanes‐Oxley Act (SOX) proscribes inside and grey directors from audit committee membership. Nonetheless, these regulations do not, and arguably cannot, consider the CEO’s myriad personal connections. So, the CEO’s influence can still be exerted through directors who appear independent, but are not independent in fact, if such directors can obtain board membership. One way for this to occur is through CEO involvement in the board selection process. Thus, when the CEO is involved in the board selection process, there is a greater risk that a director appears independent without being independent in fact. That is, although there are no statutory violations of director independence standards,
Contemporary Accounting Research – Wiley
Published: Jun 1, 2011
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