Setting the Record Straight: Three Concepts of the Independent Director
Donald C. Clarke
George Washington University Law School
March 17, 2006
GWU Legal Studies Research Paper No. 199
GWU Law School Public Law Research Paper No. 199
Despite the surprisingly shaky support in empirical research for the value of independent directors, their desirability seems to be taken for granted in policy-making circles. Yet important elements of the concept of and rationale for independent directors remain curiously obscure and unexamined. As a result, the empirical findings we do have may be misapplied, and judicial gap-filling may be harder than imagined when legislative intent cannot be divined or is contradictory.
This article attempts to unpack the concept broadly understood by the term independent director and to distinguish among its various concrete manifestations. In particular, I discuss the critical differences between independent, outside, and disinterested directors, arguing that these manifestations serve different purposes and should not be confused one with the other. This discussion is illustrated with examples from U.S. state and federal law as well as stock exchange regulations, and supplemented with comparative reference to the United Kingdom, Germany, and Japan, with a brief mention of Chinese practice as well. I also argue that the whole purpose of having independent directors is surprisingly undertheorized, leading to inconsistent rules, in particular regarding the effect of director shareholding, both across countries and within the United States.
Number of Pages in PDF File: 31
Keywords: independent directors, comparative corporate law, outside directors, non-executive directors, disinterested directors, corporate governance
JEL Classification: G34, K22, L22, M52
Date posted: March 23, 2006