Irresponsible Corporate Social Activities, Stakeholders, and Board Legal Expertise

• In Event: Financial Accounting and Reporting 7

Abstract

Motivated by the continuing controversy over the need for corporate lawyers in the post-Sarbanes-Oxley (SOX) era, we examine the causes and consequences of the appointment of directors with legal expertise in the context of irresponsible corporate social activities. First, we find that firms with more corporate social responsibility (CSR) concerns are more likely to hire directors with legal expertise to serve on the board, and the reduced firm value due to CSR concerns is mitigated after hiring lawyers for the board. Further, in response to the recent call by Moser and Martin (2012), we classify CSR concerns into two categories related to different types of stakeholders. Specifically, we classify CSR concerns as either external concerns which can do damage to external stakeholders, such as shareholders, customers, communities, and society, or internal concerns which can do damage to internal stakeholders, such as employees. We find that firms are likely to hire directors with legal expertise for CSR concerns related to external stakeholders only, since legal experts on the board only mitigate the negative effect of external CSR concerns on firm values. Collectively, our findings suggest that boards caring for shareholders’ interests are motivated to maximize firm value by appointing legal experts to serve on the board in the presence of irresponsible CSR activities, and boards care about other stakeholders only when their interests are aligned with shareholders’.

Authors

• Jun Guo, Rutgers University-Camden

• Linna Shi, SUNY-Binghamton

• Rong Yang, Rochester Institute of Technology