“Contextual Corporate Governance: Tailoring Board Independence Rules by Industry” is the title of the presentation that our Christopher Bruner, J. Alton Hosch Professor of Law at the University of Georgia School of Law, delivered Monday at the annual International Corporate Governance and Law Forum, held this year in England.
Hosted by the Centre for Business Law and Practice at the University of Leeds School of Law and cosponsored by Deakin Law School of Australia and the Alexander von Humboldt Foundation, the 2-day event brought together law and business scholars from around the world to discuss corporate board composition and process.
Bruner, a member of our Dean Rusk International Law Center Council, was among the 20 or so scholars who presented, from Australia, China, England, France, Japan, Norway, and the United States. Here’s the description of his paper:
Over recent decades, several commercially prominent jurisdictions have increasingly required that listed company boards, and certain committees, consist primarily of ‘independent’ (i.e. non-executive) directors. In the United States, for example, the Sarbanes-Oxley Act and the Dodd-Frank Act respectively require that a listed company’s audit and compensation committees be entirely independent. NYSE and NASDAQ rules go further, requiring that a majority of the whole board be independent. Such requirements reflect the prevailing view that independent directors protect minority shareholder interests through greater objectivity and practical capacity to monitor and resist domineering CEOs. That such benefits outweigh the costs – notably, limited information (relative to executive directors) – is assumed.
Recent empirical work, however, increasingly casts doubt on this assumption – at least in certain contexts. While empirical studies initially found little evidence that director independence rules impact corporate performance at all, more recent studies focusing on the cost of acquiring company-specific information suggest that the impacts of such rules are far from uniform. Indeed, mounting evidence suggests that such rules may improve performance where company-specific information can be acquired at low cost, yet harm performance where the cost of information acquisition is high. These findings – commending sensitivity to industry context – dovetail with a parallel body of post-crisis studies associating board independence (and other shareholder-centric governance structures) with potentially undesirable risk-taking incentives in certain industries – notably, finance.
These perspectives offer much-needed nuance to our thinking about corporate governance reform, strongly suggesting that one-size-fits-all rules mandating uniform board structures across the universe of listed companies may widely miss the mark in important contexts. This paper will discuss the history of such reforms, canvass relevant legal and financial literatures, and explore regulatory strategies for more targeted reforms on an industry-by-industry basis.