Does the existence of ethics and compliance committees improve stock market and financial performance?

Abstract

The major research question, in the title of this paper, was answered positively for stock market performance. The companies with Ethics and Compliance Committees (ECC) outperformed the non-ECC companies on five-year annual averages for both profit margin and net income growth rate, which may mean Wall Street investors are emphasizing non-financial performance indicators, as well as long-term financial performance indicators. Results are somewhat mixed, as investors rewarded ECC companies with superior stock market performance versus other financial measures, like returns on equity and assets, which were better for non-ECC companies. The empirical analysis in this paper relied upon prior research which had conducted content analysis of the 2015 charters of all the board committees of the Fortune top 200 corporations (Holcomb, 2017). This prior research identified 11 companies which had board committees with ethics and compliance duties, versus the Fortune top 20 companies, which delegated such duties to their audit committees. The empirical research in this paper has shown that the Ethics 11 companies outperformed the Fortune top 20 companies over the 2013-2017 period, primarily in the key stock market performance measure of the percentage change of the market capitalization from the end of 2013 until the end of 2017.