After a turbulent period marked by high-profile accounting scandals and the financial crisis of 2008, many firms, investors and regulators have grown tired of conducting ‘business as usual’. Today, the focus has shifted to revamping corporate boards: how do we assemble a board of directors that can monitor activities effectively and guide management in making the right moves?
Tackling this business challenge requires thinking with an accounting mindset, says Aida Sijamic Wahid, a professor at the Rotman School of Management.
“At its core, many management concerns are also accounting concerns. Many governance issues, including transparency, accurate reporting and fraud detection, are really focused on accounting. While we may ask the questions slightly differently, we are after the same idea – what makes boards effective? A high-functioning board will be crucial in ensuring high-quality accounting,” she explains.
Wahid’s research has identified important insights on how diversity contributes to better, more productive corporate boards. She has examined the problem from various angles.
"Generally, an effective board will include diverse viewpoints and committed individuals who are willing and able to question a firm’s operations."
—Aida Sijamic Wahid, Assistant Professor, Accounting
Notably, in a 2017 study published online in Contemporary Accounting Research, Wahid and her colleague analyzed executive compensation and earnings data, collected from 2002 to 2012, for almost 2,000 U.S. firms.
They found that, in general, companies guided by boards with a mix of short- and long- serving board members benefited from certain positive business outcomes: these companies tended to commit less accounting errors, were less likely to overcompensate CEOs and were more attentive to how their CEOs performed.
“A board that has both fresh perspectives and historical knowledge of how the company operates can be more comprehensive at monitoring a company,” explains Wahid.
And a bit of unfamiliarity among board members can be beneficial, she adds.
“If you become a cohesive group, you’re less likely to ask the tough questions and challenge each other.”
In a related project, Wahid has drafted a working paper looking at the impact of gender diversity on boards. In her preliminary findings, she’s described how companies guided by boards with both male and female directors tend to commit fewer financial reporting mistakes and are less likely to be associated with fraud.
"Different firms will have different needs, depending on their industry and how established they are. There isn’t a one-size-fits-all approach to corporate governance or assembling boards."
—Aida Sijamic Wahid, Assistant Professor, Accounting
She points out that this is not necessarily an indication that women are more ethical or inherently different than men.
“Adding women to male-dominated boards changes the dynamics of the group. It prevents groupthink.”
Though her research points to the importance of diversity in creating high-functioning boards, Wahid says it’s impossible to define what an ideal board would look like, in terms of the composition of genders, ages and years of experience.
“Different firms will have different needs, depending on their industry and how established they are. There isn’t a one-size-fits-all approach to corporate governance or assembling boards,” she says.
“Generally, an effective board will include diverse viewpoints and committed individuals who are willing and able to question a firm’s operations.”
Written by Rebecca Cheung | More Rotman Insights »