Urska Velikonja (Emory University School of Law) has posted The Political Economy of Board Independence (North Carolina Law Review, Forthcoming) on SSRN. Here is the abstract:
Boards of public corporations have become considerably more independent since the turn of the millennium. Many in the business, policy and academic communities have pointed to new legal mandates after accounting scandals as the cause of increased board independence, but empirical evidence does not bear out their claim: change took place in unregulated space.
Empirical studies on the value of independent boards are at best inconclusive, yet the trend continues unabated. Two competing theories have been advanced to explain the trend. The first contends the trend is the product of conventional wisdom, which suggests that greater independence is always better. The second suggests that improvements in securities disclosure have made it possible for outside directors to oversee managers.
This Article proposes a third explanation for the independence trend: as a mechanism to control political regulatory risk. Federal financial regulation in the wake of corporate scandal or crisis is inevitable, but the shape it takes is not. The Sarbanes-Oxley Act proved to institutional investors that corporate governance reforms, in particular board independence, can be offered as a substitute for substantive regulation of financial markets and financial intermediaries that would be more costly for firms but also potentially more effective at curbing inefficient, yet lucrative, activities.
The recent independence trend towards supermajority independent boards with a single nonindependent director and a nonexecutive chairman is a rational political strategy for institutional investors. It is efficient for institutional investors to trade marginal decreases in corporate performance for the reduced risk of costlier substantive federal regulation of corporate behavior. From the social welfare perspective, however, the trend appears to be inefficient.