An interesting new paper finds:
Religious directors or directors with a higher sense of purpose hold a longer-term perspective on CEO performance evaluation: Compared with their non-religious counterparts, religious monitoring-intensive directors are significantly less likely to change their company’s CEO based on the company’s performance over a period of one year. However, for the more extended period of 2 years, this difference in likelihood of CEO turnover significantly switches direction, consistent with the “higher purpose, incentives, and economic performance” theory by Thakor and Quinn (2020), suggesting that believers in higher purpose will tend to hold a longer-term perspective.
Religious directors or directors with a higher sense of purpose also improve the typical benefits of intense board oversight, especially when they have more power and influence on the board: We also find that religious monitoring-intensive directors further reduce earnings management, on average, all else being equal. Similar evidence that they tend to reduce excess total CEO compensation further, though ordinarily not as strong, becomes highly significant when the lead independent director or a majority of the principal monitoring committee chairs are also religious, consistent with Wabara (2021).
Independent directors’ religiosity or sense of higher purpose seems to matter more than that of CEOs for firms’ earnings quality: We also find that the monitoring-intensive directors’ religiosity is more economically significant than the CEOs’ for the quality of the earnings information in firms’ financial reports.
