Content area
Full text
Studies of corporate boards of directors often observe team-like traits. Invitations to the board are based heavily on matters like compatibility and "fit." The work of the board prizes consensus, not conflict.1 Absent some sort of crisis, outside members see their value largely in terms of constructive advice, giving insiders the benefit of an expert external perspective on the company's uncertain world.2
This portrait of cooperation is subject to two interpretations. The dominant view in corporate governance theory today is that heavy emphasis on teamwork and conflict-avoidance marks a board that has been captured by its CEO, an illusion of a governing body that acts largely as an elite private club with a rubber stamp. Much of the work in corporate governance over the last twenty-- five years in academic circles and in the lobbying efforts of shareholder activists has been to extinguish this kind of board.3 Their goal is to replace it with the new-style "monitoring" board,4 where independence, skepticism, and a rigorous
loyalty to shareholder interests5 are the dominating norms. By most accounts, this effort has had some noteworthy successes. In the United States, independent boards have become common for larger corporations-in fact, a majority of such companies have reduced insider presence to a small fraction6-and these boards do seem to be more activist. Many other countries are mimicking this emphasis on director independence as they seek to make their systems of corporate governance more attractive to investors.7
The trend toward independence, however, has encountered an empirical sticking-point. If independent boards are so self-evidently desirable, then we should see a fairly clear statistical correlation between measures of board independence and corporate profitability or stock price performance. But a growing body of economics research has been unable to find any such connection.8 Indeed, in a recent influential study, Sanjai Bhagat and Bernard Black make the case that, if anything, there is evidence "suggesting the opposite-that firms with supermajority-independent boards perform worse than other firms, and that firms with more inside than independent directors perform about as well as firms with majority (but not supermajority) independent boards."9
This is something of an embarrassment to modern dogma, as a number of noted legal scholars have recently emphasized,10although it is not fatal. Researchers concede that measurement problems...