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Independent Directors: After the Crisis

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Abstract

This paper re-evaluates the corporate governance concept of ‘hoard 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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References

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  118. See above section 4.

  119. The Combined Code of Corporate Governance is the predecessor of today’s UK Corporate Governance Code.

  120. Now UK Corporate Governance Code, supra n. 52, section B.1.

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  1. Copenhagen Business School, Denmark

    Wolf-Georg Ringe (Professor of International Commercial Law)

  2. University of Oxford, UK

    Wolf-Georg Ringe (Professor of International Commercial Law)

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This contribution benefited from comments made by participants at the Conference of the Nordic Company Law Scholars Network, held at Aarhus University in November 2012.

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Ringe, WG. Independent Directors: After the Crisis. Eur Bus Org Law Rev 14, 401–424 (2013). https://doi.org/10.1017/S1566752912001206

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