The Effectiveness of Outside Directors as a Corporate Governance Mechanism: Theories and Evidence

Northwestern University Law Review, vol. 90, no. 898 (1996).

Posted: 7 May 1998

See all articles by Laura Lin

Laura Lin

affiliation not provided to SSRN

Abstract

Despite the important monitoring role that the law and some reformers have assigned to outside directors, there is substantial disagreement about whether these directors are effective monitors of management. This Article contributes to the debate over the role of outside directors in three ways. First, Section II of the Article surveys the theories about outside directors that have been put forward in the financial economics and management science literature. Second, Section III reviews the rapidly growing body of empirical evidence that bears on those theories. To date, there have been only a few law review articles that even briefly discussed empirical studies of the effectiveness of outside directors, so my goal here is to make those studies accessible to the legal community. Third, Section IV argues that the existing theories (which tend to imply that outside directors are either never effective or always effective) are too simplistic. The empirical data are mixed as to the effectiveness of outside directors as monitors: there are conditions under which outside directors appear to be effective, and conditions under which outside directors appear to be ineffective. The policy implications of these empirical results are discussed in Section V.

JEL Classification: G34

Suggested Citation

Lin, Laura, The Effectiveness of Outside Directors as a Corporate Governance Mechanism: Theories and Evidence. Northwestern University Law Review, vol. 90, no. 898 (1996).. Available at SSRN: https://ssrn.com/abstract=10097

Laura Lin (Contact Author)

affiliation not provided to SSRN

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