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Fairfax, Lisa M. --- "The Elusive Quest for Director Independence" [2012] ELECD 465; in Hill, A. Claire; McDonnell, H. Brett (eds), "Research Handbook on the Economics of Corporate Law" (Edward Elgar Publishing, 2012)

Book Title: Research Handbook on the Economics of Corporate Law

Editor(s): Hill, A. Claire; McDonnell, H. Brett

Publisher: Edward Elgar Publishing

ISBN (hard cover): 9781848449589

Section: Chapter 10

Section Title: The Elusive Quest for Director Independence

Author(s): Fairfax, Lisa M.

Number of pages: 22

Extract:

10. The elusive quest for director independence1
Lisa M. Fairfax



1. INTRODUCTION
The inside director ­ a director currently employed with the corporation on whose board she
serves ­ is a dying breed. Although the inside director once dominated corporate boards,
today the inside director has been painted as biased, untrustworthy, and generally antithetical
to the best interests of shareholders and the corporation. As a result, inside directors have
been banished altogether from many board committees and reduced to holding a minimal
number of seats on the board as a whole (Bhagat & Black 1999, 2002; Chandler 1999;
Millstein 1993).
This virtual elimination of inside directors' role on corporate boards is inextricably linked
to the overwhelming consensus that boards should be dominated by `independent' directors.
Such consensus stems from a belief that independent directors are better equipped to monitor
the corporation, detect fraud, and protect shareholders' interests. However, the evidence
accumulated from our increased experience with independent directors calls into question
such a belief. Surveying that evidence, this chapter argues that the independent director's
value has been vastly overstated, while the inside director has been under-appreciated and
under-examined. This has important implications for corporate governance and our system of
external regulation.
The second part of this chapter reveals the manner in which the corporate landscape has
shifted to exclude inside directors from the board, and the rationale for that shift. The follow-
ing sections pinpoint the limits of independent directors' ability to be truly independent and
to effectively perform their ...