Independence Reconceived

Abstract

What makes a director independent? Scholars, regulators, and investors have grappled for decades with the fleeting notion of director independence. Originally conceived as guardians of shareholder interests that could safeguard a corporate board’s ability to check management’s power, independent directors have become a marquee feature of modern corporate governance. But do the corporate actions of directors that are considered “independent” under current standards comport with what we think independence requires? In many cases, the answer would seem to be “no.” From a lack of observable financial impact to the unabated flow of corporate scandals, independent directors seem to keep failing at the job they were championed to do.

This Article addresses this puzzling tension, offering a novel theoretical and practical reframing of the decades-old discourse around independent directors. The historical focus on the classical managerial agency costs paradigm emphasized that directors who lack ties to the management team can prevent managerial slack or value extraction. However, this approach overlooks the critical role directors also have in curbing managerial overzealousness. In today’s governance ecosystem, directors are not only tasked with preventing managerial slack. They are increasingly tasked with preventing managerial overreach and misconduct even when such overreach or misconduct is compatible with promoting shareholder value. This has important theoretical and practical implications.

This Article makes two key contributions to the literature. First, it reframes the question of what makes directors independent by supplementing the focus on agency costs as the driver for independence. By identifying a need to prevent boards from rubber-stamping managerial actions—even those taken in good faith—this Article suggests that a simple lack of ties to management fails as a litmus test for independence. Second, by reconceiving independence, this Article also provides tangible credence to the value of diversity on boards, the value and perils of hedge fund activism, and to the emerging discourse regarding ESG and stakeholderism.

Keywords: Corporate Law, Director Independence, Shareholder Interests, Boards, Stakeholderism, ESG, Board Diversity, Delaware Factors, Caremark Doctrine