Corporate Governance

Shareholder Access and Shareholder Value: The Benefit of Dissident Directors on the Board (Part 1)

By J. Robert Brown

There have been plenty of studies that have purported to study the "value" of independent directors on the boards of public companies.  The evidence is, predictably, uneven. 

This is no surprise.  For one thing, there is no guarantee that "independent" directors are in fact independent.  Among other problems, neither Delaware nor the stock exchanges take into account directors fees (allowing directors to have total income above $700,000 a year and still be considered independent) or friendship (in any meaningful way).  All of this is discussed in Disloyalty Without Limits: 'Independent' Directors and the Elimination of the Duty of Loyalty.  In other words, at least some studies purporting to weigh the value of "independent" directors are not studying independent directors at all. 

In addition, "independent" boards are invariably controlled by the CEO, who typically acts as chairman.  The chairman controls the information flow to the board and can call meetings.  Those boards with a supermajority of independent directors and a combined chair/CEO may, ironically, be more subject to CEO control than boards with fewer "independent" directors.  

Electing truly independent directors on the board can only really occur if the directors are nominated by shareholders rather than management.  Yet efforts to enhance this right have been resolutely criticized, particularly by those who want to defend the current board structure, a structure in which management nominates all of the directors, the system of voting ensures they always win, and Delaware courts resolutely refuse to impose meaningful supervisory obligations on them.

What hasn't really been studied, until now, has been the impact of boards with truly independent directors, those nominated by shareholders rather than management.  These directors are often given pejorative labels such as "special interest" directors.  The presumption is that their presence will disrupt the consensus style decision making process and that they will not act in the interests of all shareholders but only special groups of shareholders.

It seems that there is now some data on the matter and it suggests that in fact shareholders benefit from the presence of dissident directors.  We will examine the data in the next post.

Full post as published by The Race to the Bottom on June 09, 2009 (boomark / email).