The Political Economy of Board Independence
Emory University School of Law; Georgetown University Law Center
February 7, 2014
North Carolina Law Review, Vol. 92, pp. 855-916 (2014)
Emory Legal Studies Research Paper No. 13-268
Institutional investors, exchanges, and government regulators have pushed for increased board independence. The push has continued despite, at best, inconclusive evidence that independent boards improve corporate performance or reduce corporate malfeasance. This Article suggests that institutional investors value director independence because it displaces more meaningful reform.
Regulatory reform is inevitable after corporate scandals and crises. But, the content of that regulation is not inevitable. Institutional investors and managers have successfully convinced lawmakers to rely on corporate governance reforms in lieu of more stringent substantive regulation. Reforms involving independent boards have been popular with Congress and regulators because independence has connotations of objectivity, expertise, and fairness, because independence is familiar, and because Congress wants to minimize the cost of regulation and independence is inexpensive.
Independence may be inexpensive, but it is also ineffective. Managerial disloyalty to investors is only one type of misconduct. Since boards put the interests of investors first, the board may not stop misconduct that siphons resources from other groups to investors, from price fixing and bribes to excessive risk-taking and fraud. Future corporate and financial reform should not aim to protect investors from management. Rather, it needs to control externalities that investors themselves impose on others. Board independence mandates should be retired because they are inefficient at best and damaging at worst.
Number of Pages in PDF File: 62
Date posted: November 10, 2013 ; Last revised: May 24, 2014