Preventing or Concealing Organizational Misconduct? Corporate Boards in a Transitional Economy

Abstract

This study seeks to understand the potential dark consequences of corporate boards on organizational misconduct in a transitional economy. Contrary to predictions from the agency theory, we find that outsider representation on the board is associated with an increased probability of misconduct in organizations that lack legitimacy in the early transitional period. Besides, the salience of board outsiders further enhances the positive relationship between outsider representation on the board and the likelihood of organizational illegality. We suggest that boards of directors may serve as window dressing for organizations lacking legitimacy in transitional economies. Such window dressing may create a circumstance that makes organizational misconduct possible in underdeveloped legal environments. This study suggests the importance of considering the potential dark side of adopting seemingly credible corporate governance structures in transitional economies.