Repairing Legitimacy after Organizational Misconduct: Signaling Remediation via Corporate Governance Change Following Disclosures of Potential Criminal Liability

Organizational misconduct, which suggests ineffective monitoring and oversight, focuses attention on top‐level management and may damage organizational legitimacy. Under the legal reforms following corporate scandals in the early 2000s, the board of directors and executives bear direct responsibility for monitoring and oversight. As such, it is reasonable to examine whether disclosures of potential misconduct result in increased board director and CEO turnover and whether such corporate governance changes are appropriate mechanisms for organizational legitimacy repair. This study, using a sample of U.S. publicly traded companies with matched controls, investigated organizational legitimacy damage and repair in the context of disclosures of potential, federal‐level criminal liability; such disclosures are mandated in the U.S. by generally accepted accounting principles. The study builds on the body of research known as ex post settling up, where limited empirical evidence exists around the presumed legitimacy repair benefits of board and executive turnover following organizational misconduct. Regarding practice, the findings may aid organizational management in planning for the consequences of these types of disclosures. Additionally, the findings lend support to issues previously identified by regulators in relation to credit agencies and the lack of influence of non‐financial factors such as misconduct and corporate governance in their ratings.