Do Independent Directors Curb Financial Fraud? The Evidence and Proposals for Further Reform

51 Pages Posted: 28 Mar 2017 Last revised: 21 Nov 2017

Sureyya Avci

University of Michigan, Stephen M. Ross School of Business

Cindy A. Schipani

University of Michigan, Stephen M. Ross School of Business

H. Nejat Seyhun

University of Michigan, Stephen M. Ross School of Business

Date Written: November 2017

Abstract

In this article, we argue that the U.S. corporate governance rules put too much faith in the independent board members and insufficient emphasis on the shareholders themselves to control and monitor the top management. Given the agency problem between the board of directors and the shareholders, outside directors can be captured by management, thereby leading to inadequate checks on management. The evidence presented in this paper shows that outside board members do not exercise sufficient controls on the management even when the management has gone awry. To solve this agency problem, we propose increasing the power of the principals: make shareholder resolutions binding on management, require a one share, one vote rule to increase the voting rights of shareholders, as well as give the shareholders the ability to directly nominate and/or actively vote against board members.

Keywords: Corporations, Securities Law, Directors, Corporate Governance, Sarbanes Oxley, Corporate Scandals, Corporate Law, Shareholders

JEL Classification: G30, G38, K22

Suggested Citation

Avci, Sureyya and Schipani, Cindy A. and Seyhun, H. Nejat, Do Independent Directors Curb Financial Fraud? The Evidence and Proposals for Further Reform (November 2017). Indiana Law Journal, Forthcoming; Ross School of Business Paper No. 1352. Available at SSRN: https://ssrn.com/abstract=2941507

Sureyya Avci (Contact Author)

University of Michigan, Stephen M. Ross School of Business ( email )

701 Tappan Street
Ann Arbor, MI MI 48109
United States
734-747-0219 (Phone)

Cindy A. Schipani

University of Michigan, Stephen M. Ross School of Business ( email )

701 Tappan Street
Ann Arbor, MI 48109
United States
(734) 763-2257 (Phone)
(734) 763-2257 (Fax)

H. Nejat Seyhun

University of Michigan, Stephen M. Ross School of Business ( email )

701 Tappan Street
Ann Arbor, MI MI 48109
United States
734-763-5463 (Phone)

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