Cartel firms also tend to have a larger proportion of directors who serve on three or more boards at once, and of foreign board members who are often based abroad. Members of the latter group have been shown in recent studies to perform their oversight duties less efficiently on average because of their physical distance from the company’s base and their unfamiliarity with U.S. accounting laws. When they do appoint new directors, colluding firms are more likely to tap busy outsiders, consistent with the idea that management wants board members who won’t monitor the company too closely.
Auditor changes occurred with far less frequency at price-rigging firms than at companies in the control group, the authors found, with annual rates of 3.3 percent versus 6.2 percent, respectively. In addition, cartel firms tended to smooth out their earnings reports, to avoid the appearance of huge income swings. They had a 50 percent higher rate of restating financial disclosures than did the control companies, which is, the authors write, “consistent with a strategy of using misleading accounting in order to conceal the firm’s true operating performance.”
Managers at colluding companies also exercised their stock options more rapidly, a sign that these executives, in large numbers, harbored concerns about whether the cartel could be sustained, and wanted to cash out before regulators pulled the plug and stock prices plunged. However, some very early cash-outs may be intended to confuse outsiders by making it seem as if the managers didn’t anticipate the sharp rises in stock prices that initially flowed from the collusion.
The authors see similar patterns in other scenarios in which firms hide information from their own monitors or from outsiders. Indeed, they say, “we expect that [our results] should apply generally to all companies in which the managers seek to conceal poor performance or personal wrongdoing.” For example, companies may not want to lay bare their capital investments or expenditures on new product development, and could seek to obfuscate their spending levels by reclassifying the accounting reports of different business units or smoothing earnings from one time period to the next. When shareholders, analysts, and board members understand the playbook of strategies used by deceptive managers, they are more apt to uncover problems such as embezzlement or the misleading of creditors.
Firms that engage in price fixing employ a range of strategies designed to hide their activities from internal and external monitors. They are less likely than non-colluding firms to replace departing board members and typically turn to busy or foreign outsiders when they do. They smooth out their earnings numbers, issue more restatements of financial reports, and are reluctant to switch auditors.