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 highproportion of independent directors serving on their boards. This finding is robust to self-selectionand is more pronounced when those directors hold more outside directorships and have fewer stockoptions — when they have fewer economic ties to the indicted firms. Results are stronger whenindependent 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. Independentdirectors serving on indicted firms are penalized by losing board seats and vote support across theirdirectorships in other firms. Moreover, firms with more independent directors are more likely tocooperate with antitrust authorities through leniency programs and to dismiss CEOs after cartel indictments. Our results show that cartel prosecution imposes significant personal costs onto inde-pendent directors and that they take actions to reduce those costs. Understanding these incentivesis key for antitrust authorities in designing strategies for cartel prosecution.