“Learning from Fraud: How Director Experience and Board Independence Shape Monitoring Effectiveness”
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2025-06-23
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en
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Abstract
Although directors’ prior exposure to corporate fraud is often treated as a reputational liability,
little is known about its behavioral consequences for future board monitoring. This study
examines whether fraud-experienced directors increase or decrease the likelihood of future
financial fraud, and how board independence moderates this effect. Drawing on the concepts
experiential learning and moral disengagement, we develop two competing predictions: fraud
experience may enhance vigilance or, conversely, tolerance towards immorality. Using a panel
of U.S. public firms (2000–2024) and conditional logistic regression on a matched sample of
440 firm-year observations, we find that boards with fraud-experienced directors are
significantly more likely to engage in future fraud. This effect is attenuated in boards with
higher proportions of independent directors. These findings suggest that rather than serving as
a governance asset, fraud experience may erode ethical sensitivity unless constrained by
independent oversight. Our results nuance traditional agency theory by emphasizing the
conditional nature of monitoring effectiveness, shaped by directors’ experiential and cognitive
backgrounds. This study contributes to corporate governance literature by integrating
behavioral ethics into board research and offers practical implications for director appointment
and renewal decisions and regulatory frameworks governing board composition
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Faculteit der Managementwetenschappen