Independent Directors: After the Crisis

Research output: Contribution to journalJournal articleResearchpeer-review

Abstract

This paper re-evaluates the corporate governance concept of ‘board independence’ against the disappointing experiences during the 2007-08 financial crisis. Independent or outside directors had long been seen as an essential tool to improve the monitoring role of the board. Yet the crisis revealed that they did not prevent firms' excessive risk taking; further, these directors sometimes showed serious deficits in understanding the business they were supposed to control, and remained passive in addressing structural problems.
A closer look reveals that under the surface of seemingly unanimous consensus about board independence in Western jurisdictions, a surprising disharmony prevails about the justification, extent and purpose of independence requirements. These considerations lead me to question the benefits of the current system. Instead, this paper proposes a new, ‘functional’ concept of board independence. It would redefine independence to include those directors that are independent of the firm's controller, but, at the same time, it would require them to be more accountable to (minority) shareholders.
This paper re-evaluates the corporate governance concept of ‘board independence’ against the disappointing experiences during the 2007-08 financial crisis. Independent or outside directors had long been seen as an essential tool to improve the monitoring role of the board. Yet the crisis revealed that they did not prevent firms' excessive risk taking; further, these directors sometimes showed serious deficits in understanding the business they were supposed to control, and remained passive in addressing structural problems.
A closer look reveals that under the surface of seemingly unanimous consensus about board independence in Western jurisdictions, a surprising disharmony prevails about the justification, extent and purpose of independence requirements. These considerations lead me to question the benefits of the current system. Instead, this paper proposes a new, ‘functional’ concept of board independence. It would redefine independence to include those directors that are independent of the firm's controller, but, at the same time, it would require them to be more accountable to (minority) shareholders.
LanguageEnglish
JournalEuropean Business Organization Law Review
Volume14
Issue number3
Pages401-424
ISSN1566-7529
DOIs
StatePublished - 2013

Keywords

    Cite this

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    title = "Independent Directors: After the Crisis",
    abstract = "This paper re-evaluates the corporate governance concept of ‘board independence’ against the disappointing experiences during the 2007-08 financial crisis. Independent or outside directors had long been seen as an essential tool to improve the monitoring role of the board. Yet the crisis revealed that they did not prevent firms' excessive risk taking; further, these directors sometimes showed serious deficits in understanding the business they were supposed to control, and remained passive in addressing structural problems.A closer look reveals that under the surface of seemingly unanimous consensus about board independence in Western jurisdictions, a surprising disharmony prevails about the justification, extent and purpose of independence requirements. These considerations lead me to question the benefits of the current system. Instead, this paper proposes a new, ‘functional’ concept of board independence. It would redefine independence to include those directors that are independent of the firm's controller, but, at the same time, it would require them to be more accountable to (minority) shareholders.",
    keywords = "Independent directors, Corporate Governance, Minority protection, Financial crisis",
    author = "Wolf-Georg Ringe",
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    language = "English",
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    }

    Independent Directors : After the Crisis . / Ringe, Wolf-Georg.

    In: European Business Organization Law Review, Vol. 14, No. 3, 2013, p. 401-424.

    Research output: Contribution to journalJournal articleResearchpeer-review

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    AB - This paper re-evaluates the corporate governance concept of ‘board independence’ against the disappointing experiences during the 2007-08 financial crisis. Independent or outside directors had long been seen as an essential tool to improve the monitoring role of the board. Yet the crisis revealed that they did not prevent firms' excessive risk taking; further, these directors sometimes showed serious deficits in understanding the business they were supposed to control, and remained passive in addressing structural problems.A closer look reveals that under the surface of seemingly unanimous consensus about board independence in Western jurisdictions, a surprising disharmony prevails about the justification, extent and purpose of independence requirements. These considerations lead me to question the benefits of the current system. Instead, this paper proposes a new, ‘functional’ concept of board independence. It would redefine independence to include those directors that are independent of the firm's controller, but, at the same time, it would require them to be more accountable to (minority) shareholders.

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