Do Independent Directors Face Incentives to Monitor Executives?

Corporate directors who suspect malfeasance by managers may face conflicting incentives. On the one hand, encouraging transparency and demonstrating diligence by pressing for the investigation and disclosure of problems might be rewarded with re-election, appointment to seats on other boards, and greater shareholder support. On the other hand, revealing misconduct could draw negative attention to the company and result in worse career outcomes for directors. In Do Independent Directors Face Incentives to Monitor Executives? we empirically examine whether directors who publicly demonstrate diligent monitoring are rewarded. Our findings cast doubt on whether directors face strong incentives to monitor. Instead, our results suggest that directors sometimes benefit from looking the other way when they suspect problems.