Director Independence - Corporate Governance and Business Ethics

Carcello (2009) argues that non-independent directors are biased toward management by definition. Similarly, Section 303A.01 of the NYSE listing standards states that, because lack of proper oversight may allow corporate insiders to enrich themselves at the expense of shareholders, director independence is an ethical issue. There is evidence that greater board independence is beneficial to areholders. For example, Weisbach (1988) shows that boards of poorly performing firms are more likely to fire CEO's as director independence increases. In addition, Daily and Dalton (1994) find that firms filing for bankruptcy have lower percentages of independent directors five years prior to the filing than do similar firms not filing for bankruptcy. However, Byrd and Hickman (1992) show that director independence levels above 60% can hurt shareholders. In addition, Bhagat and Black (2002) conclude that increases in board independence may actually hurt shareholders. Both of these results indicate that boards do more than oversee management. For example, boards are also charged with providing strategic guidance and advice to company management. Independent directors may be less able to provide advice to management because they have no ties to the firm other than as directors. As a result, any attempts to mandate additional independent directors beyond the majority requirement already in place may not be ethical as the potential improvement in oversight from greater independence may not exceed the reduction in the value of advice and guidance provided by the board.

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Corporate Governance and Business Ethics Topics