Foreign Nationals on the Board of Directors of Russian Public Companies: Are they Gatekeepers or a Lobbying Mechanism?

• In Event: Research about Board and Strategy

Abstract

We address the longstanding debate regarding the importance of foreign nationals to the success of Russian public firms. Russian companies invite foreign directors to participate in the activities of the board of directors, in anticipation of their gatekeeping role that would lead to enhanced firm value, improved performance, and higher reporting quality. In support of this practice, we report that firms hiring foreign directors exhibit greater performance and have higher value than their peers that employ only local directors. Nevertheless, we find that these benefits are achieved at the expense of reduced reporting quality. Furthermore, we report that the probability of receiving a modified audit opinion declines with the presence of foreign directors on the audit committee, and this effect is more pronounced for firms in financial distress. Accordingly, foreign directors exacerbate management pressure on auditors to issue a “clean” opinion, which undermines the independence of the audit committee and reduces audit quality. To explain this behavior of foreigner directors, we adopt a novel perspective grounded in the social psychology research and the notion of ingroup bias. We conclude that foreign directors are not effective gatekeepers to firms’ financial systems; at best, they are a successful lobbying mechanism.

Author

• Oksana Kim, Minnesota State University - Mankato