The goal of this paper – which can be found here – is to examine ‘whether market-based penalties for nonexecutive officials [more specifically, independent board members] in firms involved in price-fixing are significant in shaping their behaviours.’ The reason to focus on independent board members is that they ‘are highly sensitive to market sanctions (for example, in the form of reputational losses). Importantly, directors have powers not only to order internal investigations but also to require officers and employees to cooperate with prosecutors. In some cases, boards also establish special committees and appoint outside counsel to consider applications for leniency. As a result, they constitute a set of corporate insiders whom antitrust policies can exploit in designing prosecution policies.’

The paper is structured as follows:

Second 2 begins by providing an overview of US and EU regimes for cartel prosecution and leniency. It also describes the role of corporate boards in cartel investigations. In the US: ‘Once the corporation learns that it is the target of a cartel investigation, board action is required to authorize an internal investigation and to require officers and employees to cooperate with it. The investigation is customarily conducted by the firm’s outside counsel, who reports either to a special committee of the board of directors or to the audit committee. On completion of the internal investigation, outside counsel informs the board about the nature of the conduct and the potential problems involving the company. Counsel then makes a report to the board about the direct and collateral consequences to the company of its participation in the suspected illegal activity. It also presents to the board the risks and benefits of making an application for leniency.’

Section 3 then uses John Connor’s (now OECD’s) Private International Cartels (PIC) database to identify those US firms that have been subject to cartel investigations – in the US or elsewhere – on which there is detailed information about their boards. This results in a sample of 192 American public firms involved in 200 cartels prosecuted by 41 antitrust authorities from 2002 to 2012.

Section 4 then tries to understand the role that independent directors play during episodes of cartel detection and prosecution. The analysis reveals:

  • a strong association between equity returns around the announcement of cartel prosecutions and the proportion of independent directors serving on prosecuted firms’ boards. This [suggests] that stock-market participants anticipate that independent directors play a positive role in reducing the costs of prosecuting illicit activities.’
  • returns are higher for companies which independent directors have no links to the CEO. This ‘suggests that directors who play a role in cartel prosecution are unlikely to have been appointed under the scandal-laden CEO’s direct influence.’
  • The expected losses of firms that are likely to be the target of subsequent cartel investigations on the announcement of a cartel prosecution in their industries are much lower for firms with a higher percentage of independent directors on their boards.

Section 5 tries to understand the incentives of independent directors that could explain these results. Independent directors seem to bear significant personal costs from public indictments, which would suggest that they are prompted to take actions to mitigate those costs. It seems that, in comparison to a control group comprised of independent directors in firms that are not party to cartels, independent directors of firms which are party to a cartel are more likely to: (i) be forced to resign; (ii) lose voting support across their portfolio of directorships.

Section 6 elaborates on the inference from the results of previous section that: ‘independent directors have incentives to aid antitrust authorities and corporate investors in correcting wrongdoing.In particular, it is found that:

  • there is a positive association between the presence of independent directors and the probability that a firm will apply for leniency. This is said to be consistent: ‘with the argument that independent directors favor cooperation with antitrust authorities to mitigate personal costs arising from prosecution’;
  • firms with a higher proportion of independent directors are more likely to replace their CEOs after cartel prosecutions. This is in line with the hypothesis that: ‘The risk of incurring personal costs from cartel prosecution should induce independent directors to take actions that enhance their reputation as monitors committed to punishing fraudulent behavior. An especially important disciplinary action the board can take is to force the replacement of the CEOs of the prosecuted firm.
  • cartels formed by firms with a higher proportion of independent directors exhibit significantly lower survival rates – i.e. they last fewer years – than cartels formed by firms with low proportions of independent directors.
  • firms charged with cartel misbehaviour tend to subsequently appoint new independent directors.

The paper contributes: ‘to the debate on antitrust policies by providing evidence of measurable, significant market sanctions on individuals involved in price-fixing schemes. Critically, those officials’ incentives and actions reduce the prosecution costs borne by shareholders and the stability of cartel schemes.’ The authors believe (rightly, in my view) that the results of the study are: ‘relevant to regulators designing and enforcing antitrust policies.’


I think that there are a number of additional inferences that could be drawn from this study, even if (significant) caution is called for in doing this: (i) this study would seem to contradict the argument that cartels are often the result of mid-level rogue employees – or, at the very least, it could indicate that boards will tend to actively hide cartel activities or look away unless independent corporate controls are in place; (ii) given the apparent consensus that pecuniary penalties imposed on companies are both extremely high and not reflective of cartelists gains, the paper may provide support for those who support penalising not only individuals directly involved in cartel activity but also board members who wilfully or negligently allowed that cartel activity to take place, or to continue to take place; (iii) the paper may suggest that competition law concerns could be relevant for the design of corporate governance rules, at least in industry sectors where collusion seems more likely.

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