The Fallacy of Director Independence

24 Pages Posted: 18 Jun 2020 Last revised: 3 Sep 2020

See all articles by Yaron Nili

Yaron Nili

University of Wisconsin Law School

Date Written: June 15, 2020

Abstract

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

Nili, Yaron, The Fallacy of Director Independence (June 15, 2020). 2020 Wisconsin Law Review 491 (2020), Univ. of Wisconsin Legal Studies Research Paper No. 1594, Available at SSRN: https://ssrn.com/abstract=3627601

Yaron Nili (Contact Author)

University of Wisconsin Law School ( email )

975 Bascom Mall
Madison, WI 53706
United States

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