The Rise of the Independent Director: A Historical and Comparative Perspective
Independent Directors in Asia: A Historical, Contextual and Comparative Approach, Dan W. Puchniak, Harald Baum, and Luke R. Nottage, eds., Cambridge University Press, 2017, Forthcoming
36 Pages Posted: 30 Jul 2016 Last revised: 28 Aug 2017
The paper provides a historical analysis of the rise of the independent director in the US and the UK. These two jurisdictions are commonly credited with creating the concept of the independent director and exporting it around the world.
In the first half of the twentieth century, a managerialist model of corporate governance dominated in the US. Inside directors, chosen and controlled by the CEO, dominated corporate boards. The concept of the independent director and the related model of the ‘monitoring board’ appeared only in the 1970s. Two watershed events sparked this dramatic change: First, the sudden collapse of the major railway company Penn Central in 1970; and second, Eisenberg’s influential book ‘The Structure of the Corporation’, published in 1976. According to Eisenberg, the board’s essential function was to monitor the company’s management by being independent from it. Today the reliance on independent directors as a panacea for various corporate governance ills has reached its zenith in the US.
As in the US, the typical British board of the 1950s was an advisory board dominated by insiders. It was only in the 1990s, with the beginning of the British corporate governance movement subsequent to the publication of the Cadbury Report, that the concept of independent directors was embraced in the UK. Since the early 2000s independent directors have dominated on the boards of listed companies. From the UK, the concept of the independent director started to conquer the European Union as a fundamental corporate governance principle. The European Model Company Act of 2015 and, on the supra-national level, the OECD Principles of Corporate Governance of 2015 recommend assigning important tasks to independent board members.
The empirical support for staffing boards with independent directors, however, remains surprisingly shaky given the ubiquitous reliance on independent directors. The global financial crisis of 2008 has added further doubts.
Note: This pre-print version is published in the Max Planck Private Law Research Paper Series with the permission of the rights owner, Cambridge University Press.
Keywords: Corporate governance, independent director, monitoring board, historical developments in the US and UK, adoption in Germany, global financial crisis, scarce empirical support
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