Impasse in Corporate Law Reform

A key aspect of the effort to reform corporate govenance after the collapse of Enron, Worldcom and Tyco, has been to strengthen the role of independent directors. The NYSE, for example, now requires a majority of independent directors on the boards of listed companies as well as Audit, Nominating and Compensation committees composed of just independent directors. But if shareholders cannot have a meaningful role in selecting these independent directors, what difference do these rules make?

In a recent paper delivered at Stanford, Professor Jeffrey Gordon from Columbia explored the significance of independent directors. He argued that they play an important role interpreting the signals of surrounding markets, particularly the capital markets to insiders. While just a draft at this point the paper is a valuable exploration of the issues surrounding independent directors.

Nonetheless, unless the SEC passes the proposal of its staff that shareholders be offered the opportunity to nominate independent directors by piggybacking on the proxy process now controlled solely by management, even formally independent directors will remain overly dependent on the CEO who is responsible for securing their position.