Economic theory and social pressure: Audit committee director departures in India

Abstract

Purpose - This study aims to examine the resignations of Indian audit committee directors after a systemic shock (failure of Satyam Computer Services Ltd.). Design/methodology/approach - The authors develop the research questions based on interviews with company directors and audit partners, in addition to economic theory. The authors then use archival data to test the research questions. Findings - The authors find that social and peer pressure is a very important factor in explaining such departures and provides the basis for some counter-intuitive empirical results, for example, directors were less likely to resign from companies audited by Indian affiliates of PricewaterhouseCoopers even though Satyam was audited by one such auditor and ownership by founding families was not associated with director departures. Research limitations/implications - Going beyond economic theory and analyzes can be useful in examining issues related to corporate boards and audit committees. Practical implications - Regulators should consider requiring disclosure about director attendance percentages, in addition to the number of meetings, at audit committee - and, perhaps, other board sub-committee - meetings. Social implications - Caution is warranted when using results from the USA and other Anglo-Saxon countries to address governance-related issues in India or other Asian countries. Originality/value - A triangulation of economic theory and societal norms enables us to gain valuable insights about the resignations of audit committee directors in India.