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Preventing Disclosure-Induced Moral Licensing: Evidence from the Boardroom

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Abstract

Market participants continue to demand greater transparency from boards of directors, yet little is known about the effect of increased transparency on director decisions. Using a sample of practicing board members, our first experiment provides evidence that increased transparency via disclosure may license directors to make more biased decisions. Guided by rich insights provided by these directors, we examine whether considering a company’s ethical values can deter disclosure-induced licensing by activating a morality mindset. In two additional experiments, we find that exposure to a code of conduct that includes an ethics component does not mitigate the licensing effects we observed; however, considering a separate, concise ethics statement does mitigate these effects. Our findings highlight important differences between the code of conduct and ethics statement for decision-making which can help organizations to mitigate adverse effects of disclosure. Implications for users of financial information and regulators are also discussed.

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Notes

  1. Our study is similar to prior studies that evaluate whether disclosing group decisions provides individuals with a license (e.g., Kouchaki, 2011). However, we examine whether transparency of the board’s decision (i.e., the act of disclosing is a good deed in itself) licenses the individual board member to act in a morally questionable manner, whereas Kouchaki (2011) examines whether observing other group members’ moral behavior in decision-making vicariously licenses an individual to act in a contrary manner.

  2. We carefully incorporated this as a design feature of our study. We told participants that the manager has received an opinion that fails to meet a target, but if they approve getting a second opinion the firm will meet that target. This ensures that the board members are approving a request to buy a predetermined outcome.

  3. Two manipulation checks were included in the experiment. The manipulation checks focused on (1) the presence (absence) of a requirement to disclose board approval to the auditor, and (2) the presence (absence) of a requirement to disclose board approval to the public. Eighty six percent answered the first manipulation check correctly, while 89 percent answered the second manipulation check correctly. All participants were used in the analysis. The inferences and conclusions of this experiment are unaffected by excluding participants who incorrectly responded to any of the manipulation checks.

  4. All directional predictions employ one-tailed equivalent tests. In addition, although converting the approve/reject decision to a binary choice variable results in a reduction in power, results of a logistic regression are consistent with the ANOVA results reported in Table 2.

  5. To enhance the generalizability and validity of our findings, we did a partial replication of our study with 175 MBA students. The results were consistent with our primary experiment. There was a slight mean shift towards approval, but the pattern of results and effect size of full disclosure versus no disclosure for participants that passed the manipulation checks was nearly identical d = 0.80 for board members and d = 0.88 for MBAs. This suggests the disclosure manipulation produced similar effects for board members and MBAs.

  6. We observed no difference between disclosure to the auditor and disclosure to the public in the first experiment, and therefore chose to manipulate the presence and absence of disclosure to both the auditor and public in Experiments 2 and 3.

  7. Our inferences and conclusions are unchanged if we exclude participants that missed a manipulation check. Our test of Hypothesis 2 remains insignificant when we exclude participants that missed a manipulation check (F-statistic = 0.00, p-value < 0.49).

  8. In all of our experiments, none of the demographic variables differ significantly between experimental conditions (p-values > 0.10), indicating adequate randomization of participants.

  9. We first attempted to collect all data via Mturk, however we struggled to recruit enough participants that met the demographic qualifications necessary to represent the population we were studying. As such, we subsequently gained access to a class of MBA students to attain a sufficient sample size.

  10. Our inferences and conclusions are unchanged if we exclude either a) participants that missed a manipulation check or b) MTurk participants. Our test of Hypothesis 2 remains significant when we exclude participants that missed a manipulation check (F-statistic = 9.19, p-value < 0.01) or exclude MTurk participants (F-statistic = 6.46, p-value < 0.01).

  11. LIWC also analyzed over 100,000 files of texts representing over 250 million words (see https://liwc.wpengine.com/compare-dictionaries/). The mean score for tone was 54.22. In comparison, the mean tone scores for directors in our sample who approved the decision are significantly higher than the LIWC mean (p-values = 0.01 or better); the mean tone scores for directors who rejected are not significantly different from the LIWC mean (p-values > 0.10).

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Acknowledgements

We thank the editor and two anonymous referees for their valuable comments and suggestions. We also thank Fiona Isiavwe, Scott Jackson, Hyun S. Jin, John Roberts, Partha Pratim Sarker, the 2017 Hawai’i Accounting Research Conference, the Wake Forest University School of Business, and the Bloch Endowment Fund.

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Authors and Affiliations

  1. Wake Forest University, 1834 Wake Forest Road, Winston-Salem, NC, 27106, USA

    Thomas G. Canace

  2. University of Missouri-Kansas City, 5110 Cherry St., Kansas City, MO, 64110, USA

    Leigh Salzsieder & Tammie J. Schaefer

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  1. Thomas G. Canace
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Correspondence to Leigh Salzsieder.

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Appendices

Appendix 1: Code of Conduct used in Experiment 2

Ethical Code of Conduct

Oversight

CGC’s Ethical Code of Conduct is endorsed by and has the full support of CGC’s Board of Directors. The Board of Directors and management are responsible for overseeing compliance with these standards. We are each required to annually review, acknowledge, and understand these standards.

Ethical Standards

Legal Compliance

In conducting the business of the Company, all directors, officers and employees shall comply with applicable laws, rules and regulations at all levels of government.

Timely and Truthful Disclosure

All disclosures must be full, fair, accurate, timely and not misleading. Such disclosures must contain thoroughly and accurately reported financial and accounting data, with no material omissions.

Uncompromising Integrity

Integrity and our reputation are fragile; doing it the right way is imperative. All of us have a personal responsibility to manifest the highest standards of uncompromising ethics and integrity in all interactions. You should never compromise your personal integrity or the company’s reputation and trust in exchange for any short-term gain.

Assessing Ethical Impact of Decisions

We act as one company. In making decisions, we must think through how others would see and judge our actions and the consequences if they read about them in the news, internet, or social media.

Appendix 2: Examples of Public Company Ethics and Values Statements (as of April 28, 2022)

Hasbro, Inc

Ethics in Action

Ethical behavior is second nature at Hasbro. Our culture of honesty and integrity starts at the top and permeates the organization. Our robust ethics and compliance program is tailed to meet our business needs and has the full support of our chairman and CEO and the senior management team

https://csr.hasbro.com/en-us/governance-and-ethics#:~:text=Ethics%20in%20Action,and%20the%20senior%20management%20team

Apple, Inc

Ethics and Compliance

Apple conducts business ethically, honestly, and in full compliance with the law. We believe that how we conduct ourselves is as critical to Apple’s success as making the best products in the world. Our Business Conduct and Compliance policies are foundational to how we do business and how we put our values into practice every day

https://www.apple.com/compliance/

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Canace, T.G., Salzsieder, L. & Schaefer, T.J. Preventing Disclosure-Induced Moral Licensing: Evidence from the Boardroom. J Bus Ethics 187, 841–857 (2023). https://doi.org/10.1007/s10551-022-05226-7

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