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When the Board Agrees with the CEO’s Politics, Oversight Suffers

Similarity of political views between CEOs and their boards strengthens directors’ empathy for chief executives and thus weakens their monitoring of CEO performance and compensation, says a team led by Jongsub Lee of the University of Florida. A study of thousands of U.S. firms shows that this political alignment, which is common, also reduces the quality of financial reporting: A small increase in board–CEO “political homophily” leads to a 3% increase in the marginal probability of a firm’s being involved in high-profile corporate fraud. The alignment effects are most pronounced for small boards that frequently interact with the top executive, the researchers say.