Independent voices make for safer companies, Wang’s research shows

by Chuck Gordon

As a finance professor at Wingate University, Dr. Zhiyan Wang emphasizes in his classes the ethics and sustainability of business practices. Now he can use his own published research as an example.

Using empirical data from the Occupational Safety and Health Administration and from S&P Capital IQ, Wang and Dr. Lixiong Guo, of the University of Mississippi, determined that corporations whose boards of directors have a greater number of "independent" members experience better workplace safety. Their findings were published in late August by SSRN, formerly known as the Social Science Research Network, in a paper titled "Board Structure and Employee Safety and Health."

Back in the early 2000s, a series of corporate scandals, most notably at WorldCom and Enron, led to Congress's creation of the Sarbanes-Oxley Act (SOX). Among other things, SOX requires corporations listed on the New York Stock Exchange or the Nasdaq to have at least 50 percent of their board members be independent, which means they are not part of the management team and receive no compensation from the company, other than for their board service.

Wang says that independent, or "outside," board members tend to have strong incentives to advise their companies to have long-term value, since their reputation is at stake. "Inside" directors, he says, can undermine shareholders' and stakeholders' interests through their close relationships with, and lack of monitoring of, management.

"Independent directors have a reputation to protect," Wang says. "If they cannot do well for the corporation, they will face some reputation damage that makes it harder for them to find the next job, so they are incentivized to do a good job for the firm, compared to the inside directors."

SOX also requires that companies' audit and nominating committees consist entirely of independent members or directors.

Independent members serve as monitors who place a check on executives who are often obsessed with a company's short-term stock price and their private benefits, and forgo investments in sustainable business activities, such as pollution controls, employee welfare and community engagement.

Wang and Guo found that companies that switched to having at least half of their board members be independent reduced their incidence of workplace injuries by 9 percent and were 17 percent less likely to violate OSHA standards. When board members are in it for the long haul, he says, fewer corners are cut and disasters like the BP Deepwater Horizon oil spill become less likely.

That outcome is obviously better for employees, but it benefits shareholders too, Wang says.

"If you have bad safety, your productivity is likely to go down," he says. "You will have more operational disruption, and then you will have to pay more medical costs, compensation and insurance premiums. If the workers are safe and happy, firm value will be higher. In this area, the shareholder interest is aligned with the stakeholder interest."

Professionally, Wang is driven to discover how companies can be better citizens.

"A large part of my research, really, is to think about, What are some good things corporations can do for society?" he says. The research with Guo was an extension of his Ph.D. studies, but he says he is open to having Wingate students help him with future research.

Wang hopes that his and Guo's findings influence both companies and regulators to value outside opinions.

"One thing that I think is a takeaway for companies is basically that this mindset should be incorporated into the business world," he says. "If your business strategy is focused on the long term, you want to get along with your employees and get along with your stakeholders. This is something for the managers to think about.

"We see from the literature that independent directors have a positive impact on both the shareholders and the stakeholders," Wang adds. "That gives the regulator confidence to continue to adopt this policy going forward. I think this is the biggest contribution we make."

Nov. 12, 2024