Social norms for fairness and board voting behavior: An experimental investigation

Research Question/Issue Social norms theory suggests that people voluntarily defend social norms even when their economic interests are not directly affected by norm violations. On the basis of this theory, we posit that when managers seek personal gains at the expense of shareholders, independent directors may be motivated by social norms for fairness to prevent unfair outcomes. We conducted an experiment to investigate the roles of social norms for fairness in a board wherein insiders and uninformed independent directors simultaneously voted in favor of or against a project with either good or bad quality. Research Findings/Insights Independent directors who valued higher levels of fairness norms were less likely to vote in favor of the project. This negative relationship was higher when insiders had poor reputations. However, insiders were inclined to vote in favor of the project, regardless of project quality. Furthermore, fairness norms had a double-edged effect on board performance, which was dependent on project quality. Theoretical/Academic Implications We adapt social norms theory to the board voting scene with features of group decision-making and information asymmetry. We find that fairness norms may motivate independent directors to vote against the project. However, the norm heterogeneity of independent directors greatly reduces their bargaining power with insiders, which suggests that monitoring independent directors who are driven by fairness norms has little effect on the voting behavior of insiders. Practitioner/Policy Implications For regulators and firms, we suggest that fairness norms should be treated as a two-edged sword. The brightness (or darkness) of social norms depends on the trade-off between gained fairness and loss of board performance. Governance mechanisms that can reduce information asymmetry and norm heterogeneity of independent directors may help maintain fairness in the board while reducing its negative effect on board performance.