The independent director expectations gap and the effects of hindsight bias

Submission note: A thesis submitted in total fulfilment of the requirements for the degree of Doctor of Philosophy to the Department of Accounting, College of Arts, Social Sciences and Commerce, La Trobe University, Bundoora.

The role of independent directors is of particular interest in today’s society due to the recent high-profile corporate collapses of the early 21st century. In response to the considerable loss of shareholder wealth, corporate governance best practice guidelines emphasise the need for independent boards. Regardless of regulatory bodies’ best efforts, the empirical research reports inconsistent findings with respect to the relationship between independent directors and firm performance. Commentators have suggested such inconsistent findings and questions regarding the effectiveness of independent directors are reflective of an expectations gap. Moreover, the expectations gap might be further exacerbated by the fact that evaluators judge the actions of independent directors in hindsight. This thesis examines the independent director expectations gap and the effects hindsight bias has on evaluative judgements of decisions made by independent directors. The research examines the opinions and judgements of 134 subjects, including independent directors, executive directors, business journalists and investors. In order to test for an expectations gap, the questionnaire examined differing opinions related to several roles of independent directors. The results of Kruskal-Wallis and Mann-Whitney U tests indicate that independent directors are facing an expectations gap in respect of their control, service and strategic roles. The field experiment examined how respondent groups evaluated decisions made by independent directors. The results of the Analysis of Variance tests indicate that: (1) business journalists and investors provide lower evaluative judgements of decisions made by independent directors than did independent directors (reflective of an expectations gap); and (2) evaluative judgements of decisions made by independent directors are affected by outcome information (hindsight bias). Further analysis and robustness tests corroborate the results of the study. This thesis primarily contributes to the academic literature by examining: the effects hindsight bias has on the independent director expectations gap; the expectations gap related to decisions made by independent directors; stakeholder perceptions with respect to what roles independent directors should perform; and the expectations gap in the context of Australia. Policymakers and regulators could use the results of this thesis to create guidelines educative material aimed at reducing the independent director expectations gap; implement hindsight debiasing strategies; and contribute to director liability reform.