Whistleblowers on the board? The role of independent directors in cartel prosecutions

Abstract

Stock market reactions to news of cartel prosecutions are muted when indicted firms have a high proportion of independent directors serving on their boards. This finding is robust to self-selection and is more pronounced when those directors hold more outside directorships and have fewer stock options — when they have fewer economic ties to the indicted firms. Results are stronger when independent directors’ appointments were attributable to SOX, preceded the CEO’s appointment, or followed class action suits — when they have fewer direct ties to indicted CEOs. Independent directors serving on indicted firms are penalized by losing board seats and vote support across their directorships in other firms. Moreover, firms with more independent directors are more likely to cooperate with antitrust authorities through leniency programs and to dismiss CEOs after cartel indictments. Our results show that cartel prosecution imposes significant personal costs onto independent directors and that they take actions to reduce those costs. Understanding these incentives is key for antitrust authorities in designing strategies for cartel prosecution.