Towards a credible system of independent directors in controlled firms

Publication Type

Journal Article

Publication Date

5-2020

Abstract

In the past decades, most jurisdictions around the world have required or recommended public companies to increase the number of independent directors sitting on their boards as a means of protecting outside investors from the opportunism of insiders. However, despite the efforts to increase the presence, power and number of independent directors, this article argues that most countries around the world have failed to create a credible system of independent directors. This failure is due to the fact that regulators and policymakers do not seem to take into account the role and power that the CEO — in companies with dispersed ownership structures — and the controlling shareholder — in companies with concentrated ownership structures — may play in the appointment, remuneration, and removal of independent directors. Therefore, the influence of corporate insiders in the appointment and removal of independent directors undermines the credibility of these actors to protect outside investors from the opportunism of insiders.In companies with dispersed ownership structures, letting the shareholders decide on the appointment and removal of independent directors may increase the credibility of independent directors. For this reason, thispractice — followed by most jurisdictions around the world — makes sense in companies with dispersed ownership structures, as is the typical case of large corporations in the United Kingdom and the United States. Nonetheless, in companies with controlling shareholders, which are the most common types of firms around the world, leaving the decision to the shareholders’ meeting will mean that the controlling shareholders will have the power to ultimately appoint and remove independent directors. Therefore,outside investors will have reasons to believe that, in those decisions in which the interest of the corporation may differ from those of the controlling shareholders, independent directors will favor the interests of the latter at the expense of minority investors. As a result, regardless of whether such a situation of opportunism ultimately exists or not, there will be a reasonable lack of confidence that may harm firms’ access to finance and the development of capital markets. This article seeks to address this problem by suggesting a new system of appointment and removal of independent directors that, while preserving the ability of the controller to appoint the majority of the board, provides greater confidence and protection to minority investors in addition to promoting other benefits for the decision-making process in the boardroom.

Keywords

independent directors, controllers, shareholders, tunneling, minority shareholders

Discipline

Banking and Finance Law

Research Areas

Corporate, Finance and Securities Law

Publication

Australian Journal of Corporate Law

Volume

35

Issue

1

First Page

31

Last Page

55

ISSN

1037-4124

Publisher

LexisNexis Australia

Comments

This paper is subject to embargo

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