Is the Independent Director Model Broken?

33 Pages Posted: 30 Jul 2013

Date Written: July 29, 2013

Abstract

The common law concept of the disinterested director developed into the model of an independent director and was advocated by the Securities and Exchange Commission (SEC) as a general ideal and by court decisions in a variety of situations. The SEC has generally succeeded in imposing its corporate governance views concerning independent directors in the wake of scandals. Although the composition and behavior of securities markets and investors has changed drastically since the SEC was established in 1934, the SEC has persisted in its path dependent view that independent directors, ever more stringently defined, should dominate the boards of public companies. This article will critically address the question of what is the function and rationale for such directors.

The independent director ideal has not been embraced all over the world. Neither has shareholder primacy. In particular, in some countries the controlling shareholder is considered to be not independent because one of the goals of corporate governance is the protection of minority shareholders. Also, where the government is a major shareholder, the independent director model is problematic.

This Article will outline the evolution of the independent director model as championed by the SEC, and discuss criticisms of the independent director model. It also will set forth alternatives to the shareholder primacy theory of the firm because shareholder primacy is related to the independent director model. Finally, the article will discuss corporate governance models outside the United States, particularly in Europe and in China.

Keywords: corporate governance, independent directors, investment company governance, Sarbanes Oxley Reforms, Dodd Frank Reforms, board primacy, shareholder primacy, stakeholder theory, bank boards, government shareholders, European corporate governance, Chinese corporate governance

Suggested Citation

Karmel, Roberta S., Is the Independent Director Model Broken? (July 29, 2013). Seattle University Law Review, 2013 Forthcoming, Brooklyn Law School, Legal Studies Paper No. 348, Available at SSRN: https://ssrn.com/abstract=2302777

Roberta S. Karmel (Contact Author)

Brooklyn Law School ( email )

250 Joralemon Street
Brooklyn, NY 11201
United States
(718) 780-7946 (Phone)
(718) 780-0375 (Fax)

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