Unconscious Bias and the Limits of Director Independence

Abstract

Corporate directors make difficult decisions: How much should we pay our CEO? Should we permit a lawsuit against a fellow director? Should we sell the company? Directors are legally obligated to decide in good faith based on the business merits of the issue rather than extraneous considerations and influences. Naturally, some directors may have preferences, or even biases: Our CEO, my colleague and friend, deserves a lot; The company should not sue my fellow board member; We should not sell, because after all, I would like to remain a board member. But the courts presume that independent directors either do not have these preferences or can make decisions without being affected by them. Similarly, independent directors acting in good faith are likely to believe that they are either unbiased or have overcome their biases. Based on a synthesis of more than two decades of social psychology research, this article argues that frequently the courts’ presumption and the directors’ belief will be wrong. First, directors are likely to have preferences, even though they sometimes will not be consciously aware of them. Second, regardless of directors’ good faith, unconscious and, to a significant extent, uncontrollable cognitive processes will prevent the directors’ decisions from being unaffected by their preferences. Given this serious flaw in the conception of independent directors’ decision-making ability, the Article briefly evaluates several legal and procedural solutions, including heightened judicial scrutiny, expanded roles for other decision makers, and changed decision-making processes.

Keywords: corporate governance, board of directors, unconscious bias

JEL Classification: K22