The Fallacy of Director Independence
24 Pages Posted: 18 Jun 2020 Last revised: 3 Sep 2020
Date Written: June 15, 2020
Director independence has become a key cornerstone of the contemporary corporate governance landscape. Over the past few decades, the composition of public firms’ boards of directors in the United States has changed dramatically, shifting towards an increased reliance on directors labeled as “independent.” Courts, regulators, and investors have come to increasingly rely on these independent directors and have made their presence on boards a priority.
However, despite the increased attention, the current system of selecting, anointing, and ensuring director independence is laden with gaps. This Essay highlights three key issues with the current independence framework. First, the current designation and disclosure framework for director independence is inadequate, providing companies with too much discretion and leaving shareholders with insufficient information. Second, the current structure of boards further complicates the ability of directors to act independently. Third, key board leaders such as the independent chair and the lead independent directors who have been lauded as the standard-bearer for independence, may in fact lack true independence or lack the effective powers to carry out their roles. As these gaps in the director independence framework continue to emerge, this Essay cautions against a deferential reliance on the director independence framework.
Keywords: Corporate Law, Board of Directors, Director Independence, Corporate Governance, Lead Independent Directors
JEL Classification: K10, K22
Suggested Citation: Suggested Citation