Independent Directors as Securities Monitors

43 Pages Posted: 30 Jan 2006

See all articles by Hillary A. Sale

Hillary A. Sale

Georgetown University Law Center; Georgetown University - Robert Emmett McDonough School of Business

Abstract

This paper considers the role of independent directors as securities monitors. Rather than engaging in the debate about whether independent directors are good or bad, important or unimportant, the paper takes their existence and basic governance role as a given, focusing on their role as detailed in the federal securities laws, regulations, and releases. To the extent that directors are supposed to play a monitoring role in the corporation, exercising both guidance and a check and balance, the securities laws are part of the mechanism to ensure that they fulfill that role.

From the SEC's perspective, independent directors are on the board for a reason. Their role is to act as securities law monitors. Although this role is particularly serious when it involves statements the directors draft or sign, it also includes an ongoing responsibility to be informed of developments within the company, to ensure good processes for accurate disclosures, and to determine if disclosures are adequate. Independent directors with expertise should be involved in reviewing and, sometimes, drafting statements. All directors, however, should be fully aware of company statements and sufficiently engaged and active to question and correct inadequate disclosures. This role of securities monitor is yet another way of implementing the information-forcing-substance disclosure model that the SEC has always utilized to achieve corporate governance. In addition to defining and animating the role of independent directors as securities monitors, I review the ways in which private causes of action and the SEC's enforcement powers are available to ensure that directors have the proper incentives to fulfill their securities monitoring role and provide some scenarios for the SEC to use to fulfill its enforcement role.

Keywords: directors, corporate governance, liability, securities law, corporate law

JEL Classification: K22

Suggested Citation

Sale, Hillary A., Independent Directors as Securities Monitors. Business Lawyer, Vol. 61, No. 4, 2006; U Iowa Legal Studies Research Paper No. 05-38. Available at SSRN: https://ssrn.com/abstract=900458

Hillary A. Sale (Contact Author)

Georgetown University Law Center ( email )

Georgetown University - Robert Emmett McDonough School of Business ( email )

3700 O Street, NW
Washington, DC 20057
United States

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