Does CEO Career Horizon Lead to Corporate Misconduct ...review.management.ntu.edu.tw/paper/7493-P.pdf147 NTU Management Review Vol. 28 No. 3 Dec. 2018 Although the present study CEO

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DOI:10.6226/NTUMR.201812_28(3).0005

總經理管理任期對企業不當作為之影響：以台灣半導體企

業為例

Does CEO Career Horizon Lead to Corporate Misconduct? Evidence of Taiwanese Semiconductor Firms

Abstract

In the wake of corporate social responsibility, the academia and practitioners are increasingly concerned with the causes and consequences of corporate misconduct. Among theoretical and empirical probes into the issue, a CEO’s career horizon is thought to be a key factor of the quality of executive decision making. In a sample of 1,124 firm-year observations in semiconductor industry in Taiwan, the study argues that CEO career horizon has an inverted-U effect on the incidence of corporate misconduct. Further considering the monitoring roles of board size and board functional diversity, we found that a board with members from diverse functional backgrounds is better able to mitigate the detrimental effect of CEO career horizon on corporate misconduct rather than a large-sized board. This study contributes to the literature by highlighting the critical roles of CEOs and boards in corporate irresponsible behavior.【Keywords】 CEO career horizon, corporate misconduct, board size, board functional

diversity

摘要

隨著企業社會責任的愈受重視，實務與學術界不斷關注對企業不當作為的成因與後果。根據相關理論與實證研究，總經理管理任期被認為對企業營運決策的良窳有著高度的關連。爰此，本研究進一步探討總經理管理任期是否對於企業不當作為產生影響。本研究利用台灣半導體產業作為研究對象，根據 1,124筆公司－年資料的分析結果，發現總經理管理任期與企業不當作為之間存在著非線性的倒 U型關係。為降低企業不當作為發生的機率，本研究進一步考量董事會治理的調和作用，研究結果顯示 (1)董事會規模的增加對於總經理管理任期在企業不當作為的影響無顯著調和效果；(2)董事會成員的功能背景之多樣化能夠有效緩解總經理管理任期與企業不當作為之關係。綜上，本研究之研究成果進一步填補相關文獻在探討企業不當作為上的不足。

【關鍵字】總經理管理任期、企業不當作為、董事會規模、董事背景多樣性

Cheng-Yu Lee, Department of Industrial Management and Information, Southern Taiwan University of Science and Technology

李振宇 / 南臺科技大學工業管理與資訊系

Hsueh-Liang Wu, Department of International Business, National Taiwan University吳學良 / 國立臺灣大學國際企業學系暨研究所

Chia-Jung Lee, Department of International Business, Tunghai University李佳蓉 / 東海大學國際經營與貿易學系Received 2015/10, Final revision received 2016/8

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1. IntroductionThe literature shows that one of the primary reasons for corporate misconduct is due

to the pressure from disappointing earnings (Baucus, 1994; Baucus and Near, 1991; Hill, Kelley, Agle, Hitt, and Hoskisson, 1992; McKendall and Wagner, 1997). Irresponsible conduct in the corporate world, whether centered around corruption, bribery, fraud, or other greed, tends to have negative consequences such as the damage to shareholders’ long-term interests and firm reputation (Daboub, Rasheed, Priem, and Gray, 1995; Greve, Palmer, and Pozner, 2010; Zeidan, 2013). For example, Baucus and Baucus (1997) found that illegal corporate behavior is negatively related to the convicted firms’ long-term profitability. In addition to the impact on financial returns, the misconduct record is viewed as a liability when firms need to develop partnerships (Jensen, 2006; Sullivan, Haunschild, and Page, 2007). Although the literature of corporate misconduct has been burgeoning (O’Connor, Priem, Coombs, and Gilley, 2006; Williams, Fadil, and Armstrong, 2005; Zhang, Bartol, Smith, Pfarrer, and Khanin, 2008), more inquiries into the causes of corporate irresponsible behavior are in need (Chin, Hambrick, and Treviño, 2013; Wu, 2014).

According to the literature of corporate misconduct (e.g., Baucus and Near, 1991; Gabbioneta, Greenwood, Mazzola, and Minoja, 2013), the main causes of engaging in irresponsible activities include larger firm size, operating in dynamic or competitive environments, and more records of prior violations. These findings imply certain organizational and environmental conditions allure decision makers to conduct business illegally, but the intent behind the decision should be of more importance. As corporate decisions are ultimately made by the Chief Executive Officer (CEO), some characteristics of the CEO have been proven to be related to corporate irresponsible behaviors, such as executive compensation (Bergstresser and Philippon, 2006; Harris and Bromiley, 2007; Zhang et al., 2008), hubris (Tang, Qian, Chen, and Shen, 2015) or overconfidence (Chen, Crossland, and Luo, 2015), narcissism (Rijsenbilt and Commandeur, 2013), tenure (Williams et al., 2005), etc. Among all possible causes of corporate conducts, the research on the motive of a CEO to engage in irresponsible activities remains sidelined. The career horizon of a CEO is viewed as one of the key factors behind the proactiveness of executive decisions (Antia, Pantzalis, and Park, 2010; Lee and Chang, 2014; Musteen, Barker, and Baeten, 2006; Narayanan, 1985, 1996), but few studies have ever assessed its impact on corporate misconduct. The first objective of this study is thus to examine the effect of CEO career horizon on corporate misconduct.

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Although the present study CEO career horizon is considered related to corporate misconduct, some governance arrangements may take their toll on the influence of CEO career horizon, especially board composition (Chen, 2013; McDonald and Westphal, 2010; Lin, Kuo, and Su, 2008; Williams et al., 2005). As we know, “many hands make light work”; a board composed of more members might be more capable of preventing misconduct from occurring. This suggests that board size would interplay with the effect of CEO career horizon in regard to the incidence of corporate malfeasance. In addition to board size, the composition of a board may also confound the relationship between CEO career horizon and corporate misconduct. Considering the complexity and diversity of business misconduct, board members usually have difficulty in controlling and curbing all kinds of misconduct and crimes. Board members who have diversified skills and experiences may also be more helpful in detecting the corporate malfeasance and thus reducing the incidence of business misconduct; that is, the diversity of board composition, such as functional and industrial background of members, can have a moderating effect on the CEO career horizon-corporate misconduct relationship. In short, the second purpose of this study is not only to examine whether the relationship between CEO career horizon and corporate misconduct is moderated by a firm’s board composition, but also a response to previous research which calls for further and deeper exploration into the moderating effects of board characteristics on corporate social responsibility (Ibrahim, Howard, and Angelidis, 2003; Rao and Tilt, 2016).

A sample of the publicly listed semiconductor firms in Taiwan is chosen for this study because these firms not only play an important role in Taiwan’s economy, but occupy a dominant position in the world’s semiconductor industry. Any misconduct undertaken by Taiwanese semiconductor firms may result in serious consequences of an economic, environmental and/or social nature. For example, the water pollution caused by Advanced Semiconductor Engineering Inc. (ASE), the biggest semiconductor assembly and test firm in the world, heavily damaged the reputation of Taiwanese firms across the industry. Other types of corporate misconduct have also been seen in this industrial sector, such as Procomp Informatics’ financial fraud, which seriously disrupted both the capital market order and investor confidence. Considering that every company has their own specific practices, simply looking at one type of corporate misconduct may not be sufficient to ferret out the full extent of corporate misconduct. Thus, this study aims to investigate the effect of CEO career horizon on corporate misconduct by considering various types of corporate wrongdoing. The proposed research questions were examined


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using a sample of 1,124 firm-year observations for 121 publicly listed Taiwanese semiconductor firms over the period of 2002~2013.

The rest of the paper is organized as follows. Section 2 presents the theoretical background and develops the hypotheses. Section 3 describes our sample and measures. Section 4 reports the empirical results before we conclude with managerial implications and limitations in the final section.

2. Literature Review and Hypotheses DevelopmentCorporate misconduct refers to the actions taken by executives to conduct illegal

operations when they perceive that the upside benefits of doing so will outweigh the downside risk (Mishina, Dykes, Block, and Pollock, 2010). Corporate misconduct thus can be a simple but unethical way for executives to reduce the pressure in achieving revenue and earnings goals by increasing the short-term financial profits, or offsetting the foreseeable losses (McKendall and Wagner, 1997; Mishina et al., 2010; Zhang et al., 2008). However, when firms are convicted of misconduct, they may rapidly lose valuable goodwill and reputation, which take a long time to build, and in turn diminish the firm value. In other words, corporate misconduct may imply the tension between short-term profits and long-term losses; the impulse to commit illegal conduct should be associated with the planning horizon of key decision makers.

According to the agency theory, the reason why CEOs misbehave may be related to the varying levels of risk between principals (shareholders) and agents (CEOs) (Jensen and Meckling, 1976). The shareholders usually are able to neutralize the risks associated with their personal wealth by holding a diversified investment portfolio and thus have a longer horizon towards their investments. In contrast, CEOs are excessively committed to their companies and insufficiently diversified. Agency theorists believe that CEOs are motivated to adopt or ratify improper conduct in order to reduce their risk of loss or maximize their returns at the expense of shareholders’ wealth. It is recommended to align executive interests with that of shareholders, in order to decrease misconduct (Jensen and Murphy, 1999). A number of agency-based studies have examined the effects of CEO incentive schemes on corporate misconduct (Harris and Bromiley, 2007; McGuire, Dow, and Argheyd, 2003; O’Connor et al., 2006; Zhang et al., 2008). Although investigations on incentive-based instruments have been accumulating in determining the CEO’s influence on corporate misconduct, the complete explanation of why CEOs engage in illegal and unethical behavior still remains elusive (Chin et al., 2013; O’Connor et al., 2006; Zhang et al., 2008).

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Given the distinct influences of corporate misconduct on a firm’s short-term and long-term value, incentive-based solutions prescribed by the agency theory may not solve the problems completely. As Eisenhardt (1989) suggests, using agency theory with complementary theories may be a supplementary way to address the complex relationship between CEOs and corporate misconduct. From the upper echelon perspective (Hambrick and Mason, 1984), the psychological assessment of CEOs helps to explain the motivation for business misconduct. For example, Blickle, Schlegel, Fassbender, and Klein (2006) found that some personalities of executives more likely cause white-collar crimes. Some literature using psychological reasoning suggests certain attributes of decision makers, such as their career horizon, would affect corporate decision making (Antia et al., 2010; Lee and Chang, 2014). In this vein, the study contends that the CEO career horizon is a determinant of corporate misconduct. In the following section, we combine insights from the upper echelons perspective with the previously mentioned agency theory to explore and analyze the effect of CEO career horizon on corporate misconduct.

2.1 CEO Career HorizonThe decisions of individuals are considered associated with a wide range of motives,

such as the need for achievement, affiliation, belonging, power, recognition, safety, social status, etc. (Donaldson, 1990; McGregor, 1960). However, the motives of individuals are strongly governed by their age and life experiences (Blau, Gustad, Jessor, Parnes, and Wilcock, 1956; Super, 1980; Roberts and Mroczek, 2008). The psychological and socio-psychological theorists believe that an individual’s attitudes towards a decision are affected by his/her personal characteristics (Aubert, 1952; Thornton and Dumke, 2005). For example, Green (1981) identifies age as one of the relevant influential factors associated with cognitive processes and decision-making. In line with this notion, scholars in business related fields argue that CEOs are also subject to the influence of their age. The upper echelons theory also suggests that the career stage and age of CEOs have substantial impacts on their decision horizon (Daboub et al., 1995; Hambrick and Mason, 1984). Empirical literature further proves that CEOs’ career horizons are profoundly associated with the time left before their retirements (Matta and Beamish, 2008; McClelland, Barker, and Oh, 2012; Oh, Chang, and Cheng, 2016); i.e., when CEOs are close to departing from their position, their career horizon will be shorter (Antia et al., 2010).


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According to the arguments that derive from agency theory incorporated with psychological perspective, the agency cost increases when CEO career horizon gets shorter (Dechow and Sloan, 1991; Oh et al., 2016). CEOs with shorter career horizon would less likely consider long-term consequences of their decisions (Matta and Beamish, 2008). As Davidson, Xie, Xu, and Ning (2007) found, CEOs with shorter career lengths tend to focus more on short-term earnings for three possible reasons. First, long-term profitability becomes irrelevant to the wealth of those CEOs who are approaching retirement (Gibbons and Murphy, 1992). Second, in addition to the irrelevance of wealth, CEOs nearing the end of their careers tend to maintain firm performance to avoid unexpected job termination. Third, CEOs with shorter expected career lengths have a hard time finding a similar position elsewhere (Antia et al., 2010). In sum, those CEOs approaching retirement are expected to focus more on the short-term gains and stock price stability at the expense of long-term strategy and investment. In other words, when expectations on the short-term earnings might not be reached, CEOs with short career horizon retirement would prefer to try to meet the expectations by any means. Several studies support the idea that CEOs with short career horizons are more likely to have myopic thinking in running business, such as earning manipulation (Barker and Mueller, 2002; Lee and Chang, 2014) or corporate frauds (Johnson, Ryan, and Tian, 2009).

In this line of discussion, some studies show the opposite results, although we have grounds for establishing the correlation between CEO career horizon and the odds of committing corporate fraud. Semadeni, Cannella, Fraser, and Lee (2008) indicate that CEOs with shorter expected career horizons tend to preserve their reputation and thus are more cautious about corporate misconduct; that is, CEOs approaching retirement have a higher tendency to maintain a good reputation which may influence their job offers on the boards of other firms after their retirement (Fich and White, 2005; Khanna, Kim, and Lu, 2015). These findings indicate that the relationship between CEO career horizon and corporate misconduct may not be simply positive or negative, but rather an inverted curvilinear effect.

A survey conducted by Wang (2010) may further support the above-mentioned argument; this survey collects and provides statistics for entrepreneur crime in China in 2009, including the types of business crime, criminals’ ages, educational levels, and so on. The result shows that the peak age for white-collar crime is from 47 to 53. Although this age bracket is commonly considered the peak of an individual’s career and personal growth, the higher career adaptability and lower career concerns give CEOs more

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confidence or even hubris to become reckless in regard to the probable consequences of questionable conduct. As Gellerman (1986) suggests, these “good” top executives may rely on their experience and rationalization to justify illegal or unethical behavior. Viewed from the CEO’s perspective, how they conceptualize and value certain corporate conduct may be associated with their age. Thus, it is reasonable to hypothesize that the likelihood of corporate misconduct increases as the CEO career horizon becomes shorter, but decreases as CEOs are close to the end of their executive careers.H1. There is an inverted U-shaped effect of CEO career horizon on the likelihood

of corporate misconduct: it is positive as CEOs’ career horizon decreases initially, but becomes negative as their career horizon further decreases.

2.2 The Moderating Effects of Corporate Governance Given the likelihood of firms engaging in corporate misconduct may be determined

by the career horizon of CEOs, the mechanisms by which executives’ decision making is monitored are expected to mitigate the agency conflict problems. As agency theorists suggest, the primary function of boards is to safeguard shareholders’ interests from management misappropriation (Shleifer and Vishny, 1997). In the recent decade, the responsibilities of boards have been extended to cover the interests of more stakeholders (Muthusamy, Bobinski, and Jawahar, 2011), i.e., some characteristics of board composition are associated with constraining the propensity of CEOs in engaging in improper conduct (Chen, 2013; McDonald and Westphal, 2010; Williams et al., 2005). Taking the complexity and changing nature of corporate misconduct into consideration, boards of directors need more substantial, professional and careful supervision to monitor the top management team. The board competence is also a result of the composition of a company’s board. As such, in the following subsections, we will separately discuss whether board size, board diversity and their interplays with CEO career horizon alleviate or worsen the incidence of corporate misconduct.2.2.1 Board Size

The debate on whether large board size is beneficial or detrimental to corporate governance of a firm is still inconclusive. Some studies posit that larger boards are more inefficient in nature than smaller ones because more directors lead to free-riding problems and conflicts in coordination and communication processes and thus result in poorer monitoring effect (Cheung, Stouraitis, and Wong, 2005; Eisenberg, Sundgren, and Wells, 1998).


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However, larger board size is not always detrimental to corporate decision making. Resource dependence theorists suggest that, compared to smaller boards, larger boards may contain more professional expertise and experiences to obtain and process a great deal of information about their firms (Borch and Huse, 1993; Pfeffer, 1973). In addition, large-sized boards can be divided into several subcommittees that separately perform the different administrative functions (Williams et al., 2005), i.e., firms with larger board size are better able to monitor their executives from various angles. Several lines of evidence demonstrate that larger board size can be used to prevent business failure, for example, Chaganti, Mahajan, and Sharma’s (1985) comparison study of failed and non-failed retailing firms reveals that non-failed firms have bigger board sizes, while Gales and Kesner’s (1994) investigation of firms’ bankruptcy shows that non-bankrupt firms tend to have more directors. Judging from the above, larger board size could increase tendencies of monitoring powers so that the effects of self-interest motivated CEOs would be alleviated. By extension of this reasoning, the unlawful desires of CEOs, driven by their career horizon, would be alleviated; that is, the inverted-U effect of CEO career horizon on corporate misconduct will be more salient when a firm has a smaller board size because the monitoring is provided by fewer board members; on the other hand, the relationship between CEO career horizon and corporate misconduct can be mitigated by more frequent and intensive monitoring.H2. The inverted U-shaped relationship between CEO career horizon and

corporate misconduct becomes weaker in firms, when their boards are composited of more members.

2.2.2 Board Functional DiversityBesides the board size, the diversity among board members is also likely to affect a

board’s decision making. The diversity of a board can basically be broken down into two types, i.e., diversity in observable attributes (e.g., age, race, gender and others) and diversity in underlying attributes (e.g., functional background, technical skills and others). By comparing the causes and effects of the two types of diversity, Milliken and Martins (1996) argue that diversity in underlying attributes is more job- or task-related and has higher potential to impact the board performance. Among the various underlying attributes of board members, several studies further suggest that the functional diversity of board members is particularly relevant to board governance and mostly used to conduct research at the board level (Jensen and Zajac, 2004; Milliken and Martins, 1996; Minichilli,

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Zattoni, and Zona, 2009). The upper echelon literature also indicate that functional backgrounds of board members provide a significant lens for the effectiveness of corporate governance (Nicholson and Kiel, 2004; Petrovic, 2008; Westphal and Milton, 2000) because decision makers with diverse functional backgrounds help reduce the threat of organizational inertia and groupthink (Kakabadse and Myers, 1996). In line with these arguments, the study suggests that functional diversity of a board should be more critical than other forms of diversity to the effectiveness of board governance.

Functional diversity means that board members have heterogeneous business skills, experience, expertise and knowledge. A board with higher levels of functional diversity can provide the corporation with more resources, including legitimacy, advice and counsel, which can create channels for communication with external organizations and help address business challenges (Arfken, Bellar, and Helms, 2004; Zona, 2014). Nevertheless, when it comes to subjects or topics with uncertainty and inherent complexity such as innovation or high-tech contexts, the importance of functional diversity has been extensively supported by the literature (Haynes and Hillman, 2010; Hsieh, Chung, and Huang, 2013; Minichilli et al., 2009). The experimental studies also prove that board members with diversified functional backgrounds can bring firms a competitive advantage (Zona, 2014).

In addition, a company’s success and long-term survival is also dependent on the board’s monitoring and supervision capability. Board members with different functional backgrounds are more likely to perceive things differently and confront the board about issues (Petrovic, 2008). As Datta and Rajagopalan (1998) suggest, “the more specialized the knowledge base, the greater the likelihood that individual will view problem situations from a narrow, specialized perspective and make choices within their specialized knowledge”. Board members with homogeneous functional backgrounds may intend to deal with issues in a similar way. In addition, by applying the findings of Simons, Pelled, and Smith (1999), board members with diversified functional backgrounds should possess a diversity of thought that introduces more detailed and comprehensive assessments with regard to corporate managements decisions that come from top executives. Mishra and Jhunjhunwala (2013) thus posit that with the purpose of a firm’s lasting success, the board must possess a wide range of knowledge, expertise, skills, and perspectives to enhance its monitoring capabilities.

Based on the above mentioned rationale, a board’s functional diversity is one of the foundations of monitoring capability. Considering the detrimental nature of corporate


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misconduct, the effect of CEO career horizon on corporate misconduct should be inevitably confounded by the diversity of board members’ functional backgrounds. In this vein, the relationship between CEO career horizon and corporate misconduct can be neutralized when boards have higher levels of functional diversity. Specifically, the inverted U-shaped effect of CEO career horizon on the incidence of corporate misconduct becomes smaller in magnitude.H3. The inverted U-shaped relationship between CEO career horizon and

corporate misconduct becomes weaker in firms, when their boards have higher levels of functional diversity.

3. Research Design3.1 Sample

The objective of this research is to examine the relationship between CEO career horizon and the occurrence of illegal corporate acts. To test the above hypotheses, we constructed a sample with a wide range of variance with respect to corporate irresponsibility issues. The population we used included all semiconductor companies publicly listed in the Taiwan Stock Exchange and the Over-the-Counter Securities Exchange. Such a sample ensures that all the companies observed met the same reporting standards required by the authorities and has periodically been audited by independent third parties. The consistency of these standards guarantees the reliability of the data. After removing some observations for which data were missing, 1,124 firm-year observations for 121 publicly listed Taiwanese semiconductor firms in the period of 2002~2013 were employed to test the hypotheses.

3.2 Dependent VariableCorporate misconduct. Prior studies indicate that firms engage in various misconduct

activities to make company performance look better, such as accounting fraud, antitrust activities, patent infringement, environmental pollution, labor disputes and other actions that violate criminal laws (Baucus and Baucus, 1997; Williams et al., 2005). The data can be collected from the Corporate Social Responsibility (CSR) database provided by the Taiwan Economic Journal (TEJ), which systematically collects information from multiple sources. Specifically, the TEJ collects information on corporate misconduct from the Market Observation Post System (M.O.P.S.) of the Taiwan Stock Exchange Corporation, Economic Daily News, Commercial Times, and other public resources. The database

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provides four categories of corporate misconduct information: (1) corporate misconduct in environmental protection and security1, (2) corporate misconduct in information disclosure2, (3) corporate misconduct in labor relationship3, and (4) other corporate misconduct outside the above three categories. Since companies may not adopt irresponsible behaviors to lower their costs or make additional short-term profits for one single reason, we thus follow Williams et al. (2005) to measure corporate misconduct by the total number of related events in which firms were found guilty or penalized in litigated cases in the focal year.

3.3 Independent VariablesCEO career horizon was measured by a CEO’s age (Oh et al., 2016; McClelland et

al., 2012); that is, as the age increases, the career horizon of a CEO decreases. The data was collected from “The Manager Directory in Taiwan” published by China Credit Information Service and other public resources. Regarding two moderators, Board size was measured as the total number of directors on the board in the focal year (Coles, Daniel, and Naveen, 2008). Data on board members were obtained from annual reports and the TEJ database. Board functional diversity was captured by functional heterogeneity of board members using Blau’s (1977) heterogeneity index. We followed the categorization of Hillman, Cannella, and Paetzold (2000) for the functional roles of directors—insiders, business experts, support specialists, and community influentials. This paper treats the inside directors who serve currently or have served in the past as active owner-agents of the firm. Business experts are directors who are active or retired executives in other for-profit organizations, and directors who serve on other large corporate boards. Support specialists include legal experts, finance specialists, as well as sales and marketing professionals. Community influentials include politicians, academics, or other community members in generally non-profit organizations. The higher value of this variable shows higher board functional diversity of a firm.

1 The company violated a statute of environmental protection, industrial safety, or public safety and was fined by the administration or exposed by media.

2 The company was fined by the administration for a non-disclosure or late disclosure of corporate information.

3 The company was involved in a labor dispute or violated labor rights and was fined by the administration or exposed by media.


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3.4 Control VariablesIn addition to the independent and moderating variables, we also included several

levels of control variables (i.e., firm-, board- and CEO-level control variables), which fall outside the purview of our inquiry but may have effect on corporate misconduct.

This study first considers two firm-level variables, i.e., firm size and performance, because they have been proven to be related to corporate misconduct (Baucus and Near, 1991; Gabbioneta et al., 2013). We measured firm size as the natural logarithmic transformation of the number of total assets. Considering the different meanings of various performance indicators, the decision-making processes of CEOs are likely influenced by different performance metrics, suggesting the necessity of controlling their possible impacts (Elyasiani and Zhang, 2015; Shani and Westphal, 2016). Each firm’s ROA and ROE during the study period were thus included as control variables.

In addition to board size and board functional diversity, we also controlled for several board-level variables, some of which were shown to predict a firm’s level of corporate ethics and social responsibility (Harjoto and Jo, 2011; Liao, 2010), including board independence, national diversity and ownership. Board independence, as the ratio of outside directors was calculated by dividing the number of outside directors by the total number of directors for each firm during the study period. We were conservative in our identification of outside directors, and we did not consider those directors who currently work for the firm in some capacity, or have previously worked for the firm, or have family or professional ties with the CEO. Board nationality was calculated by dividing the number of foreign directors by the total number of directors for each firm, and board ownership was measured as the number of shares owned by the board members multiplied by the stock price per share on the last day of the stock market (Barker and Mueller, 2002).

Regarding CEO-level control variables, CEO duality, CEO overconfidence, CEO ownership and CEO tenure were controlled for because they have been identified in prior studies as influencing illegal activity within firms. CEO duality (i.e., the separation of the CEO and chairman positions) was measured as a binary variable which was coded 1 when the CEO was not the board chair and 0 when both positions were held by the same individual. About the measure of CEO overconfidence, we used a dummy variable which was coded 1 if the CEO was a net buyer of the company stock for a longer period than when they were a net seller during the first five years in which the company appeared in their sample; whereas if on the contrary, a dummy variable coded 0 was used (Malmendier

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and Tate, 2005). CEO ownership was measured by the ratio of number of shares owned by the CEO to total outstanding shares in the fiscal year. Finally, about the control of CEO tenure, the age and tenure of CEOs seem to be highly interrelated, but recent studies indicate that they are not closely linked with each other (Barker and Mueller, 2002; Musteen et al., 2006; McClelland et al., 2012). In other words, CEO age and tenure may have different effects on corporate misconduct. We thus measured CEO tenure by the total number of years in the CEO position at the focal firm.

4. ResultsTable 1 shows the means, standard deviations and correlations of all the variables.

Similar to the findings of prior studies (Beitel, Schiereck, and Wahrenburg, 2004), the correlation between ROE and ROA was also found to be highly correlated. The other correlation coefficients are within acceptable limits, suggesting that multicollinearity is not a problem in this work.

Poisson regression and negative binomial regression analyses are widely used to test hypotheses when the dependent variable is an event count variable. However, negative binomial regression is used to estimate count models when the Poisson estimation is inappropriate due to over-dispersion. By comparing the mean and standard deviation of the dependent variable, the value of standard deviation is obviously greater than the double value of the mean, indicating that a negative binomial regression model could be applied to handle the effect of over-dispersion. We therefore tested our hypotheses by using negative binomial regression analyses. Considering the data structure of our sample (i.e., panel data), a series of longitudinal negative binomial regression models were thus adopted to test our hypotheses. Before performing regression analyses, a Hausman test was executed to compare random- and fixed-effects estimations of the model. This test rejected the appropriateness of using random-effects estimation (Prob>chi2 = 0.000).


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Table 1 Descriptive Statistics and Correlation MatrixMean SD 1 2 3 4 5 6 7 8 9 10 11 12 13

1 Firm size 21.356 17.717 1 Firm size

2 ROA 12.384 14.414 0.066* 2 ROA

3 ROE 6.903 24.952 -0.011 0.803* 3 ROE

4Board independence

0.204 0.153 -0.058 0.088* 0.130* 4Board independence

5Board national diversity

0.052 0.137 0.291* 0.118* 0.035 0.003 5Board national diversity

6Board ownership

30.427 15.296 -0.131* -0.004 0.023 -0.271* -0.058 6Board ownership

7 CEO duality 0.790 0.407 -0.216* -0.052 -0.013 0.066* 0.031 7 CEO duality 0.219*

8CEO overconfidence

0.379 0.485 -0.030 0.014 0.028 -0.014 0.040 8CEO overconfidence

0.155* 0.221*

9CEO ownership

2.752 3.329 0.013 0.093* 0.168* 0.197* -0.155* 9CEO ownership

0.150* 0.023 0.006

10 CEO tenure 6.076 6.798 -0.184* -0.135* -0.118* -0.321* -0.085* 10 CEO tenure 0.216* 0.116* 0.084* -0.101*

11CEO career horizon

53.431 7.632 -0.137* 0.063 -0.060 -0.106* 0.110* 11CEO career horizon

-0.052 0.076* -0.052 -0.206* 0.219*

12 Board size 9.504 2.169 0.239* 0.164* 0.045 -0.145* 0.183* 12 Board size -0.127* -0.138* -0.022 -0.141* -0.103* 0.070*

13Board functional diversity

0.522 0.503 -0.012 -0.016 -0.007 0.041 -0.055 13Board functional diversity

-0.030 0.013 -0.044 0.048 -0.046 -0.042 -0.085*

14Corporate misconduct

0.073 0.416 -0.015 -0.038 -0.060 -0.019 0.050 14Corporate misconduct

0.078 0.051 0.097* -0.028 0.063* 0.065* 0.030 -0.004

Note: *p < 0.05

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Mean SD 1 2 3 4 5 6 7 8 9 10 11 12 13

1 Firm size 21.356 17.717 1 Firm size

2 ROA 12.384 14.414 0.066* 2 ROA

3 ROE 6.903 24.952 -0.011 0.803* 3 ROE

4Board independence

0.204 0.153 -0.058 0.088* 0.130* 4Board independence

5Board national diversity

0.052 0.137 0.291* 0.118* 0.035 0.003 5Board national diversity

6Board ownership

30.427 15.296 -0.131* -0.004 0.023 -0.271* -0.058 6Board ownership

7 CEO duality 0.790 0.407 -0.216* -0.052 -0.013 0.066* 0.031 7 CEO duality 0.219*

8CEO overconfidence

0.379 0.485 -0.030 0.014 0.028 -0.014 0.040 8CEO overconfidence

0.155* 0.221*

9CEO ownership

2.752 3.329 0.013 0.093* 0.168* 0.197* -0.155* 9CEO ownership

0.150* 0.023 0.006

10 CEO tenure 6.076 6.798 -0.184* -0.135* -0.118* -0.321* -0.085* 10 CEO tenure 0.216* 0.116* 0.084* -0.101*

11CEO career horizon

53.431 7.632 -0.137* 0.063 -0.060 -0.106* 0.110* 11CEO career horizon

-0.052 0.076* -0.052 -0.206* 0.219*

12 Board size 9.504 2.169 0.239* 0.164* 0.045 -0.145* 0.183* 12 Board size -0.127* -0.138* -0.022 -0.141* -0.103* 0.070*

13Board functional diversity

0.522 0.503 -0.012 -0.016 -0.007 0.041 -0.055 13Board functional diversity

-0.030 0.013 -0.044 0.048 -0.046 -0.042 -0.085*

14Corporate misconduct

0.073 0.416 -0.015 -0.038 -0.060 -0.019 0.050 14Corporate misconduct

0.078 0.051 0.097* -0.028 0.063* 0.065* 0.030 -0.004

Note: *p < 0.05


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Table 2 The Results of Negative Binominal Regression ModelsN = 1124 Model 1 Model 2 Model 3 Model 4 Model 5 Model 6 Model 7

Constant 1.153 (1.572) -23.182 (9.424) -23.020* (9.502) -24.674* (9.852) -19.533 (9.968) -19.310 (10.018) -22.808 (11.389)

Firm size -0.062* (0.025) -0.046† (0.027) -0.045† (0.027) -0.046† (0.027) -0.060* (0.030) -0.068* (0.031) -0.075* (0.032)

ROA -0.013 (0.018) -0.009 (0.018) -0.009 (0.017) -0.010 (0.018) -0.004 (0.018) -0.003 (0.018) -0.007 (0.019)

ROE -0.003 (0.006) -0.003 (0.006) -0.003 (0.006) -0.003 (0.006) -0.003 (0.006) -0.004 (0.006) -0.002 (0.006)

Board independence

0.248 (1.406) 1.028 (1.454) 0.987 (1.451) 0.909 (1.458) 0.480 (1.490) 0.500 (1.493) 0.243 (1.487)

Board national diversity

-3.382† (2.055) -4.184* (2.023) -4.029* (2.058) -3.817† (2.036) -5.655* (2.286) -5.666* (2.270) -5.510* (2.090)

Board ownership

-0.011 (0.013) -0.009 (0.012) -0.009 (0.012) -0.007 (0.013) -0.006 (0.013) -0.004 (0.013) -0.004 (0.013)

CEO duality 0.089 (0.834) 0.337 (0.860) 0.293 (0.865) 0.292 (0.881) 0.703 (0.942) 0.710 (0.944) 0.800 (1.019)

CEO overconfidence

0.965** (0.294) 1.017** (0.301) 1.030** (0.301) 1.025** (0.301) 0.910** (0.291) 0.938* (0.287) 1.019* (0.295)

CEO ownership

0.151† (0.078) 0.128† (0.076) 0.125 (0.076) 0.121 (0.077) 0.108 (0.089) 0.115 (0.090) 0.122 (0.094)

CEO tenure -0.043 (0.043) -0.061 (0.043) -0.061 (0.043) -0.060 (0.043) -0.020 (0.048) -0.022 (0.047) -0.002 (0.051)

CEO career horizon

0.780* (0.324) 0.793* (0.328) 0.848* (0.341) 0.808* (0.341) 0.822* (0.343) 1.034* (0.418)

CEO career horizon2

-0.006* (0.003) -0.006* (0.003) -0.007* (0.003) -0.007* (0.003) -0.007* (0.003) -0.009* (0.004)

Board size (BS)

-0.049 (0.105) -0.005 (0.114) -0.077 (0.119)

Board functional diversity (BFD)

-3.457** (1.339) -3.148* (1.314) -2.783* (1.303)

CCH × BS -0.116 (0.108) -0.173 (0.118)

CCH × BFD -0.165* (0.085) -0.220* (0.099)

Log likelihood -126.714 -122.434 -122.325 -121.751 -117.893 -116.003 -114.462

Wald χ² 22.46* 29.96** 29.83** 30.95** 32.43** 36.67*** 38.03**

Note: †p < 0.1, *p < 0.05, **p < 0.01, ***p < 0.001 Standard errors are in parentheses.

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N = 1124 Model 1 Model 2 Model 3 Model 4 Model 5 Model 6 Model 7

Constant 1.153 (1.572) -23.182 (9.424) -23.020* (9.502) -24.674* (9.852) -19.533 (9.968) -19.310 (10.018) -22.808 (11.389)

Firm size -0.062* (0.025) -0.046† (0.027) -0.045† (0.027) -0.046† (0.027) -0.060* (0.030) -0.068* (0.031) -0.075* (0.032)

ROA -0.013 (0.018) -0.009 (0.018) -0.009 (0.017) -0.010 (0.018) -0.004 (0.018) -0.003 (0.018) -0.007 (0.019)

ROE -0.003 (0.006) -0.003 (0.006) -0.003 (0.006) -0.003 (0.006) -0.003 (0.006) -0.004 (0.006) -0.002 (0.006)

Board independence

0.248 (1.406) 1.028 (1.454) 0.987 (1.451) 0.909 (1.458) 0.480 (1.490) 0.500 (1.493) 0.243 (1.487)

Board national diversity

-3.382† (2.055) -4.184* (2.023) -4.029* (2.058) -3.817† (2.036) -5.655* (2.286) -5.666* (2.270) -5.510* (2.090)

Board ownership

-0.011 (0.013) -0.009 (0.012) -0.009 (0.012) -0.007 (0.013) -0.006 (0.013) -0.004 (0.013) -0.004 (0.013)

CEO duality 0.089 (0.834) 0.337 (0.860) 0.293 (0.865) 0.292 (0.881) 0.703 (0.942) 0.710 (0.944) 0.800 (1.019)

CEO overconfidence

0.965** (0.294) 1.017** (0.301) 1.030** (0.301) 1.025** (0.301) 0.910** (0.291) 0.938* (0.287) 1.019* (0.295)

CEO ownership

0.151† (0.078) 0.128† (0.076) 0.125 (0.076) 0.121 (0.077) 0.108 (0.089) 0.115 (0.090) 0.122 (0.094)

CEO tenure -0.043 (0.043) -0.061 (0.043) -0.061 (0.043) -0.060 (0.043) -0.020 (0.048) -0.022 (0.047) -0.002 (0.051)

CEO career horizon

0.780* (0.324) 0.793* (0.328) 0.848* (0.341) 0.808* (0.341) 0.822* (0.343) 1.034* (0.418)

CEO career horizon2

-0.006* (0.003) -0.006* (0.003) -0.007* (0.003) -0.007* (0.003) -0.007* (0.003) -0.009* (0.004)

Board size (BS)

-0.049 (0.105) -0.005 (0.114) -0.077 (0.119)

Board functional diversity (BFD)

-3.457** (1.339) -3.148* (1.314) -2.783* (1.303)

CCH × BS -0.116 (0.108) -0.173 (0.118)

CCH × BFD -0.165* (0.085) -0.220* (0.099)

Log likelihood -126.714 -122.434 -122.325 -121.751 -117.893 -116.003 -114.462

Wald χ² 22.46* 29.96** 29.83** 30.95** 32.43** 36.67*** 38.03**

Note: †p < 0.1, *p < 0.05, **p < 0.01, ***p < 0.001 Standard errors are in parentheses.


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As Table 2 shows, we first enter the control variables in the baseline model (Model 1), and then enter CEO career horizon and its squared term in Model 2. The results for Model 2 reveal that the linear term and squared term of CEO career horizon separately have significant positive (p < 0.05) and negative (p < 0.05) effects on the likelihood of corporate misconduct. Hypothesis 1 is thus supported by our findings.

Hypothesis 2 predicts that board size can negatively moderate the relationship between CEO career horizon and corporate misconduct. According to the existing literature, there is no standard method to test the moderating effect on the nonlinear relationship. This study thus used Kim, Kim, and Lee’s (2008) approach to estimate the moderating effect on an inverted U-shaped relationship. Firstly, we estimated the direct effect of board size on corporate misconduct in Model 3. The results reveal that the direct effect of board size is negatively, but not significantly, correlated with corporate misconduct. Such a finding shows that large board size may not always imply better monitoring (Amar, Boujenoui, and Francoeur, 2011). In Model 4, we further examined the moderating effect of board size on the inverted U-shaped relationship between CEO career horizon and corporate misconduct. Although the coefficient on the interaction term is negative and consistent with Hypothesis 2, it fails to reach statistical significance. Hypothesis 2 is thus not supported.

As reported in Model 5, the significant negative effect of board functional diversity (p < 0.01) echoes the early studies, and reveals that the functional diversity of board members can fundamentally shape effective board governance (Bear, Rahman, and Post, 2010). The result shown in Model 6 indicates that the interaction of CEO career horizon and board functional diversity is negatively significant (p < 0.05), suggesting that the inverted-U effect of CEO career horizon on corporate misconduct is more moderate. Hypothesis 3 is thus supported. To illustrate the complex interaction effect, drawing upon the recommendations of Richard, Barnett, Dwyer, and Chadwick (2004), we plotted the moderating effect of board functional diversity on the relationship between CEO career horizon and corporate misconduct, as shown in Figure 1. Specifically, we divided the entire sample two subgroups (high board functional diversity vs. low board functional diversity) by the median of the board functional diversity and reran Model 2 for each of the two groups; the nuanced differences between the groups can demonstrate the effects of the moderator. Figure 1 shows that, in the firms with low board functional diversity, there is a strong inverted U-shaped relationship between CEO career horizon and corporate misconduct. In the firms with high board functional diversity, the inverted U-shaped curve

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changes: the slopes for both sides of the curve become less steep. Moreover, the relative height of both lines indicates that high functional board diversity can strongly mitigate the inverted U-shaped effect of CEO career horizon on corporate misconduct. Hypothesis 3 is hence strongly supported.

Figure 1 The Moderating Effect of Board Functional Diversity on the Relationship Between CEO Career Horizon and Corporate Misconduct

In Model 7, all the variables are considered simultaneously. The findings remain consistent with prior models, suggesting that the findings on Hypotheses 1 and 3 are robust.

5. DiscussionDespite a growing body of literature on corporate social (ir)responsibility, knowledge

concerning its causes remains incomplete, and the related studies yield mixed and inconclusive findings, most likely because some of the underlying decision-making processes have not yet been comprehensively explored. For this reason, this study examined the influence of CEO career horizon on corporate misconduct in a sample of Taiwanese semiconductor firms. Our findings provide strong evidence for the premise that


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CEO career horizon has an inverted curvilinear effect on the likelihood of corporate misconduct. However, controlling the CEO career horizon only is not an effective safeguard to reduce the odds of corporate misconduct. This study thus considered the moderating effect of board governance, which may contribute to theoretical and practical significance in our understanding of corporate misconduct, as well as shed new light on its prevention mechanism. The empirical evidence does not support that the board size mitigates the effect of CEO career horizon on corporate misconduct, but the functional diversity of company board does. In the following subsections, the theoretical and practical implications are further discussed.

5.1 Theoretical ImplicationsThe theoretical contribution of this study is to firstly extend the body of knowledge in

the causes of corporate misconduct by showing that the direct and indirect effects of CEO career horizon. That is, the CEO’s career horizon relates non-linearly to his or her perception and assessment of the course of actions. This finding is consistent with some socio-psychological evidence that age matters with the perception of ethics and behavioral intentions (Hilton, Oh, and Al-Lawati, 2006; Shreffler, Johnson, and Scheuble, 2010). In other words, the interest-alignment argument of the agency theory needs to be complemented by the psychological assessment. Also, echoing von den Driesch, da Costa, Flatten, and Brettel (2015), our finding also points out the double-edged sword effects of CEO career horizon by showing a non-linear effect of CEO career horizon or age on corporate behavior.

In addition to the direct effect of CEO career horizon, this study further investigated the moderating effect of board governance on corporate misconduct. Although corporate board has been seen as an important solution for preventing corporate wrongdoings, prior studies have rarely examined the interplay between CEO career horizon and board governance. This study extends our knowledge by examining the moderating effects of board size and board’s functional diversity. Regarding the moderating effect of board size, the insignificant effect indicates that simply increasing the board seats cannot solve the problem caused by self-serving executives. One interpretation is that the free riding problem emerges when board size increases, and that as an immediate consequence, monitoring decreases (Ghosh, 2006). Compared with the findings of prior studies, such as Goodstein, Gautam, and Boeker (1994), a large-sized board may be useful in accessing external resources but is not necessarily germane to the issue of misconduct prevention.

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Accordingly, we conclude that simply increasing the number of directors cannot alter the negative effect of CEO career horizon on the corporate misconduct problem.

In regards to the board’s functional diversity, which is traditionally treated as a means to access external resources (Hillman, Nicholson, and Shropshire, 2008), our finding adds merit to the role of a functionally diversified board in corporate misconduct prevention. Departing from previous knowledge on the importance of board governance (Zona, Minoja, and Coda, 2013; Mahadeo, Soobaroyen, Oogarah-Hanumana, 2011), our study demonstrates that a board equipped with diverse knowledge and experience becomes more relevant and effective in preventing corporate irresponsibility. Specifically, executives can use various types of corporate misconduct for their benefit. A board with diversified expertise and experience will become aware of corporate misconduct that is often hidden in many forms. Through an examination of board influence on the relationship between CEO career horizon and corporate misconduct, our study makes noticeable contributions to the agency theory and corporate governance.

5.2 Managerial ImplicationsThe findings of the present study have several managerial implications. First of all,

given the nonlinear effects of CEO career horizon on corporate misconduct, company owners should be aware of the attitude and behavioral changes associated with the aging CEO. According to our findings and prior studies in China, CEOs or top executives are most likely to be accused of corporate misconduct in their early 50s. Such a finding does not universally suggest all firms to avoid hiring CEOs in their 50s because the executives at this age are still ambitious with their career and experienced in their professions. Some evidence shows that CEOs in this life stage have the most potential to promote the desired organizational behaviors and consequences, such as firm innovativeness (Cheng and Barker, 2014; Ryan and Wiggins, 2002). Corporate owners are thus suggested to find a balance by improving the board’s governance quality, as evidenced by our findings on the moderating effects of board governance. In other words, the likelihood of any irresponsible activity can be effectively mitigated through the portfolio and competence of a firm’s board of directors.

Second, the findings for the two moderating effects suggest that the quality (i.e., functional diversity) is more important than the quantity (i.e., board size) of a board. The composition of a board, along with appropriate expertise and skills, is the key to serving the best interest of shareholders. In other words, if firms are managed by CEOs who have


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higher odds of perpetrating misconduct and are governed by directors with similar backgrounds, this may be a warning sign for possible irresponsible activities. Third, corporate misconduct could result in serious and long-lasting damage but is not easy to detect beforehand. Policymakers need to create a platform in which whistleblowers can be effectively protected and rewarded. Meanwhile, governments can attempt to deter corporate misconduct by evaluating the characteristics of the heads of corporations and establishing norms to raise the performance of corporate governance, such as through the regulations of board governance.

5.3 Limitations and Future ResearchDespite the theoretical and practical contributions made by this study, it still has

several limitations. First, this study relies on CEOs’ observable characteristics to capture their intra-psychological processes. Some scholars doubt the approach of using visible traits to measure invisible theoretical characteristics (Carpenter, Geletkanycz, and Sanders, 2004; Lawrence, 1997). Although we do not look for a means to explore the cognitive processes that actually lead CEOs to perform illegal acts, we pave the way for the future studies adopting different theoretical lens (e.g., cognitive psychology) or methods (e.g., field surveys), both of which enable researchers to collect in-depth knowledge about CEO cognition. Second, our empirical results are derived from a sample of semiconductor firms in Taiwan, thus raising a concern about the generalizability to other industrial sectors. Further studies are suggested in order to validate our findings or compare the nuances across industries. Third, based on the previous findings, this study assumes that corporate misconduct can inflict damage to a firm’s image and reputation, as well as undermine its survival. Therefore, another avenue for further studies is to adopt a more comprehensive approach and longitudinal program to extend our research efforts to the construct of organizational survival or failure. Finally, in addition to the moderating effects of board governance, other individual-, firm- or industry-level practices, such as industrial herding atmosphere, may also confound the extent of a CEO’s influence on corporate misconduct. Top managers’ characteristics (by themselves) or any internal or external contextual factor (in isolation) is inadequate to predict the incidence of corporate illegality. Therefore, future research is suggested to apply more holistic models, incorporating both external and internal factors, as well as managers’ and directors’ characteristics simultaneously, to develop richer insights into the propensity of corporate misconduct.

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5.4 ConclusionCorporate misconduct is a topic that has stirred concern, debate and controversy. The

unethical business practices hurt not only the company but shareholders, employees, communities and society as a whole. Our discussion on the effects of CEO career horizon serves as a reminder of the crucial importance of responsible senior leadership. Taken together, this study implies that a top executive’s career horizon: (1) is a critical factor in assessing a firm’s likelihood of engaging in wrongdoings, (2) has detrimental effects that could be mitigated by board governance, specifically, by a more functionally diversified board, and thus (3) is worthy of close attention from investors, regulators and governance specialists. We hope that our review and analysis could stimulate systematic and insightful scholarly attention to this important and controversial topic.


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* E-mail: [email protected] 作者也感謝臺大管理論叢編輯以及匿名評審寶貴的建議，使本文更臻完善。

作者簡介李振宇

國立成功大學企業管理研究所博士，現為南臺科技大學工業管理與資訊系教

授。主要研究領域為公司治理、策略管理、科技與創新管理等。論文發表於 IEEE Transactions on Engineering Management、Journal of Engineering and Technology Management、Technovation等期刊。

*吳學良英國伯明罕大學商學博士，現為國立臺灣大學國際企業學系暨研究所教授。主

要研究領域為策略管理、科技與創新管理、公司治理等。論文發表於 IEEE Transactions on Engineering Management、Journal of Business Research、Journal of Engineering and Technology Management、R&D Management、Technovation等期刊。

李佳蓉

國立台灣大學國際企業研究所博士，現為東海大學國際經營與貿易學系助理教

授。主要研究範疇為公司治理、家族企業、策略管理、科技創新／興業管理等。

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Does CEO Career Horizon Lead to Corporate Misconduct ...review.management.ntu.edu.tw/paper/7493-P.pdf147 NTU Management Review Vol. 28 No. 3 Dec. 2018 Although the present study CEO