Do Lead Independent Directors on the Audit Committee Affect Financial Reporting Quality?

This study examines whether lead independent directors serving on audit committees affect firms' financial reporting quality. The lead independent director is a board-of-director position that companies voluntarily adopt to improve corporate governance or respond to corporate governance criticisms. For example, when the threat to effective separation of decision making and control occurs because a powerful CEO also serves as board chair (CEO duality), the Board may appoint a lead independent director. The lead independent director position offers a compromise between CEO duality and CEO-board directorship separation. The position encompasses several responsibilities, including facilitating communication between the other independent directors and CEOs. When a lead independent director also serves on the company's audit committee, the position creates direct links among audit committees, external auditors, and CEOs. We find that companies with lead independent directors serving on the audit committee have higher financial reporting quality and more efficient audits, suggesting that lead independent directors on audit committees improve corporate governance.