Lead Independent Directors and Internal Information Environment

• Published date: 01 November 2024
• Author: Mansoor Afzali,Vasiliki Athanasakou,Siri Terjesen
• Date: 01 November 2024
• DOI: http://doi.org/10.1111/corg.12582

Corporate Governance: An International Review, 2024; 32:1035–1059

https://doi.org/10.1111/corg.12582

Corporate Governanc e: An International Review

ORIGINAL ARTICLE OPEN ACCESS

Lead Independent Directors and Internal Information

Environment

MansoorAfza li1 | VasilikiAthan asakou2 | SiriTerjesen3,4

1Department of Account ing and Commercial Law, Hanken S chool of Economics, Helsinki , Finland | 2Depar tment of Accounting and Commerci al Law,

Sobey School of Busine ss, Saint Mary's Uni versity, Halifax, Nov a Scotia, Canada | 3College of Business , Florida Atlantic Universit y, Boca Raton, Florida,

USA | 4Depar tment of Strategy and Mana gement, Norwegian School of E conomics, Bergen, Norway

Correspondence: Man soor Afzali (mansoor.afzali@hanken.fi)

Received: 23 September 2022 | Revised: 24 Febru ary 2024 | Accepted: 28 Februar y 2024

Funding: This research rec eived no specific gra nt from any funding agenc y in the public, commercial, or not- for- profit sectors.

Keywords: corporate gover nance | external in formation environment | infor mation acquisition | informat ion integration | internal in formation

environment | lead independent di rector

ABS TRAC T

Research Quest ion/Issue: This study explores the relationship bet ween the presence of a lead independent director (LID) and

firms' internal information environment. LIDs are elected independent members of the boa rd who perform key duties for the

independent directors and the board , including reviewing and approvi ng board meeting agendas, chair ing non- executive board

meetings, and acting as a liai son between the CEO and other independent directors. We hypot hesize that LID pres ence lowers

information barr iers between the CEO and the re st of the board members, enabling more rapid i nformation acquisition and in-

tegration and enhancing the intern al information environment of the firm.

Research F indings/Insights: Using a sample of US publicly listed companies from 2001 to 2019, we document that LID pres-

ence on the board is positively asso ciated with proxies of internal informat ion quality that reflect better informat ion acquisition

and information i ntegration: accuracy and pre cision of management earnings forecasts, speed of earnings announcement, and

absence of materia l weaknesses in internal controls. These results are robust to alternative model speci fications, including en-

tropy balancing , Heckman two- step correction for sel f- selection bias, f irm fixed effects , and placebo tests. Furt her analyses sug-

gest that L IDs with fi nancial expertise and audit committee memberships are more effective in positively inf luencing internal

infor mation qua lity. We also sho w that LID presence is po sitively a ssociate d with seve ral proxie s of externa l inform ation quali ty.

Theoretical/Academic Implications: We build on agency theor y to argue that LIDs improve internal information quality by

reinforcing the information quality benefits of unif ied leadership while mitigating potential compromises in information quality

arising from entrenchment. Similarly, we use arguments emanating from the novel str ategic leadership systems theor y to posit

that a L ID appointment facilitates the tasks of the CEO a nd the board, en hancing the effecti veness of both groups in their re-

spective roles: the CEO in making operating and i nvestment decisions and the board in streng thening oversight while bringin g

cohesion in their shared role of strategy v isioning and implementation.

Practit ioner/Policy Impl ications: O ur findings suggest that there is scope for shareholders t o consider L ID appointments

as an addition to their f irms' corporate governance structures to enhance t he internal informat ion environment and decision-

making efficiency. Policymakers can al so encourage LID appointments on the board when promoting best practices in corporate

governance through reg ulatory guidelines.

This is an open ac cess article un der the terms of the Crea tive Commons Attr ibution License, wh ich permits use, d istribution and rep roduction in any mediu m, provided the ori ginal work is

properly cited.

© 2024 The Autho rs. Corporate G overnance: An I nternational Re view published by Joh n Wiley & Sons Ltd.

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Corporate Governance: An International Review, 2024

1 | Introduction

A lead independent di rector (L ID) is an elected independent

member of the board tasked with perfor ming specif ic key du-

ties for the independent direct ors and the board , including

reviewing and approv ing board meeti ng agendas, cha iring

non- executive board meetin gs, acting as a liaison between the

chief executive officer (CEO) and other board members, and di-

rectly communicating with company's shareholders and other

stakeholders (Lamoreaux, Litov, and Mauler2019).1 D espite an

increase in the share of firms with a LID and recent theoreti-

cal evidence on the significance of such roles (Krause, Withers,

and Sema deni2017 ), empirical evidence on LID s' effectiveness

is scarc e.2 We fill this knowledge gap by investigating whether

LID presenc e is associated wit h better quality in the int ernal in-

formation env ironment.

The Sarba nes- Oxley Act led corporat ions to adopt st ronger

governance practices, such as sepa rating t he CEO and board

chair roles. Fir ms that maintained CEO duality were encour-

aged to adopt a LID position to st rike the right balance between

strong and unified leadership and effective and independent

management oversig ht. Krause, Withers, and Semadeni(2017 )

develop a t heoretical framework t o explain how LIDs generate

value for both the board and the firm by facilitating decision-

making between t he board and the dual leadership. In this

framework, LIDs mitigate agency conflicts by preserving the

benefits of the unity of command in CEO duality and mitigating

the risk of CEO entrenchment through high level s of oversight.

Subsequent empirical research provides further ev idence asso-

ciating LID presence with more effective monitoring and better

d e c i s i o n - m a k i n g .

Our study extends this literature by examining a key channel for

better decision- mak ing in firms with LIDs: the quality of the in-

ternal informat ion environ ment. A long- es tablished argument

in the ac counting literatu re is that high internal information

quality (hereafter IIQ) can improve managerial decision- making

(Cheng, Cho, a nd Yang 2018; Gal lemore and Labro 2015;

Goodman et a l. 2014; Heitzman and Huang 2019; Hor ngen

etal.2012; McGuire, Rane, and Weaver2018). Decision- making

improves when management benefits f rom higher in formation

acquisition (findi ng information) and h igher information in-

tegration (pre cision in assessing its impact) (Hodge, Kennedy,

and Maine s2004). LIDs may contribute to both effects through

their roles as key liaisons bet ween boards and senior mana g-

ers. LI Ds' liaison role is vita l since independent directors have

limited sources of infor mation beyond management (Duchin,

Matsusaka, and Ozba s2010).

Building on agenc y theory and strategic leadersh ip systems the-

ory, we posit that LI Ds may enhance IIQ by maintaining the

inform ation quality benefits of uni fied leadersh ip while mitigat-

ing potential c ompromises a rising f rom entrenchment (agency

theory) or by lower ing information barriers between the CEO

and the board and thereby enabling more rapid information ac-

quisition and in formation integration and more effective board

monitoring (strategic leadership system s theories). We te st our

hypothesis using a sample of non- financial and publicly listed

US firms from 2001 to 2019. We follow accounting research (e.g.,

Gallemore and Labro2015) in estimating five IIQ measu res that

capture t he quality of information ac quisition and integr ation:

management forecast accuracy, management forecast precision,

earnings an nouncement speed, absence of material weaknesses

in internal controls, and an aggregate measure based on the first

principal component of the four IIQ measures. We capture LID

presence using an indicator variable, which equals 1 if the firm

has designated a LI D, and 0 otherwise.

Drawing from companies' LID charters and survey evidence on

LIDs' role (Stein and Egan 2010), we outline several channels

through which LIDs may improve IIQ. These channels include

LID's role in challenging the assumptions in management earn-

ings forecasts, rei nforcing the board's input in the forecasting

process, speed ing up internal oversight process es, streamlining

financial reporting processes , and developing policies and pro-

cedures t hat promote transpa rency, accountability, and ethical

behavior. Consistent with these arg uments, our multivariate

regression model reveals a positive relationship between LID

presence and the five IIQ measures. These results are robust to

controlling for remaining gover nance mechanisms, alternative

model specif ications addressing endogeneity, fi rm fixed effects

mitigating the influence of time- inva riant firm characteristics,

and placebo tests to rule out potential mechan ical bias.

Additional cross- sectional tests show that the positive associ-

ation between L ID presence and IIQ is more pronounced for

firms with LID s who are financial experts or audit committee

members. Financial expertise and audit committee membership

provide L IDs with deeper insights into the firm's f inancial re-

porting processes and internal control systems. T hese insights

enable them to provide more effective oversight and contribute

to a higher qua lity internal information environment. Finally,

we show that LI D presence is positively assoc iated with several

proxies of externa l information environment (i.e., il liquidity

measures, skewness of stock returns, and financial statement

opacity), providing evidence of a beneficial impact of LID pres-

ence on the entire information environment.

Despite the significant advancements in research on board in-

dependence, there is limited at tention on the impact of LIDs on

the effectiveness of corporate governance mechanisms. Pr ior

research demonstrates that firms with LIDs have improved ac-

counting performance (Larcker, Richardson, and Tuna2007),

higher analyst recommendation s (Krause, Wither s, and

Semadeni 20 17), h igher CEO t urnover- performance sensitivity

(Lamoreaux, Litov, and Mauler2019), greater investment effi-

ciency (Rajkovic 2020), better accruals quality and lower earn-

ings management (Bryan and Mason2022; Hsu etal.2022), and

more conserv ative tax policies (Gao and Omer 2023). This e vi-

dence raises the need for a more thorough examination of how

LIDs affect decision- making that lea ds to such organiz ational

outcomes. Our st udy responds to this need by examin ing a key

channel through which LID s can foster better decision- makin g,

that of improving the quality of the internal information envi-

ronment. We build a theoretical framework about how LIDs'

roles and responsibilities m ay impact the quality of the inter nal

information environment and prov ide associated evidence. Our

key a rgument is that LIDs act as an effe ctive communication

channel between the mana gement and t he boards, enabling

more timely acquisition and integrat ion of information between

various layers of the organ ization and better oversight. As such,

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