Independent directors and new corporate governance paradigm: Pros & cons of independent directors

Abstract

In the last few decades there has been a powerful trend in favor of independent directors for public firms. For larger public companies around the world, it is the norm for the board of directors to include outside directors who are not involved in the day-to-day running of the company but are generally expected to take a central role in overseeing company managers. This paper presents the major drivers of the trend towards board independence and the main reasons for greater role of independent directors and stricter standards of independence, their number and diversity. The shift towards independent directors is reflected not just in the numbers or percentages but also in the strengthening of various mechanisms of director independence. The cumulative effect of the considered reasons led to a significant reconceptualization of the board’s role and structure. The effect of the reforms on the board’s role is to make the role of the independent directors more important than ever. Despite the fact that evidences that connect the increased presence of independent directors to shareholder benefit are weak, the expectations of independent directors has become too large. However, there are counter views and reasons which suggest that the role of independent directors is uncertain. Difficulties regarding the regulations of these issues and reserves about expectations of independent directors are the final concerns of this paper. If the rise of independent directors is tied to a new corporate governance paradigm that looks to the stock price as the measure of most things, and independent directors, namely independent boards, should serve as a visible hand to balance the tendency of markets to overshoot, there is the open question is whether the independent board has even independence from stock market and unknown market pressure.