I think imposing a minimal requirement of having some independent directors in publicly held corporations is a justified requirement. The concept of having at least some directors who have no other role in the corporation seems intuitively appealing: it seems that these directors would assuredly provide a neutral perspective, and it also seems that these ‘external’ directors could have a higher onus to act for the best interests of the corporation because their initial acceptance onto the board and their continued tenure would likely be heavily dependent on the reputation they had established for themselves as successful directors. Moreover, since shareholders have a role in shaping the direction of the company, through their power to vote for the directors on the board, it seems important that at least some of the directors vying for positions of direct control on the board are not all also involved in the voting process (albeit under their other ‘hat’ of shareholder).
In the case of private companies, I see a potential obstacle to imposing such minimum independence requirements in the case of smaller family-run businesses, as family relationships are specifically proscribed as a material relationship influencing independence. However, I still feel that independence requirements are important for good governance, and that some variation on such requirements should also be imposed on private companies – particularly because these companies could eventually decide to become public – thus carrying over any independence concerns which could now impact the wider range of public shareholders’ investment (who would presumably be unaware of the potentially suspicious corporate structure).
Amelie, I completely agree about the importance of having independent directors in publicly held companies and believe that this neutral perspective could be highly beneficial to have a balanced board. I also really appreciate your point about how in close corporations, some directors could also be shareholders who have a part in electing the board. This point further supports how essential it would be to have some independent directors that are not shareholders.
Thanks for your insight Amelie. I had not previously thought about the implications of varying degrees of board member independence for when a private company goes public. As a potential shareholder I would be wary of purchasing stock in such a company, and would hope to add some minimum standards for board member independence into the Articles.
Great post! I completely agree about having independent directors’ neutral perspective in publicly held companies. I also agree with the potential problem of having minimum independence requirements for directors in smaller family-run private businesses. But, I there are also benefits to having independent directors in private companies. Like you said for public companies, these independent directors can provide a neutral perspective and can maybe prevent “groupthink” from occurring where unwise decisions are made because there is no alternative perspective or nobody willing to question or criticize the ideas of the group. Also, maybe it is nice to have an independent neutral perspective in family-run businesses in case there is some sort of family feud and an independent person is needed? That’s probably a stretch though, and it would be difficult for smaller family-run business to have independent directors.