Corporate governance and its effect on ethical lapses

Abstract

There is much research that examines the connection between different elements of corporate governance to specific firm outcomes (Brahmana et al., 2021; Fakhfakh & Jarboui, 2022), including ethical outcomes (Veldman et al., 2023). However, little is written about how to prevent ethical lapses from ever happening. Using the framework of agency theory, this study examined the effect of the board of directors’ power and the chief executive officer’s (CEO’s) power on the firm’s ethical behaviors. We sought to find out if strong governance, whether CEO or Board, could play a role in stopping ethical lapses before they happen. To evaluate this relationship, two indices were used. The board power index included board size, non-duality, lead director, board composition, and ownership. The CEO power index included tenure, ownership, and board member nominations. The sample consisted of 102 large, public United States (U.S.) firms. Logistic regression was utilized to determine if board power or CEO power could influence ethical firm behaviors. The findings indicated that strong boards were associated with more ethical firms. CEO power did not seem to have the same relationship. These findings are important to help firms structure boards to increase vigilance and reduce the likelihood of ethical lapses.