How to Enhance Directors’ Independence at Controlled Companies

Abstract

Directors' independence at controlled companies is an intriguing corporate governance conundrum. Recently, Bebchuk and Hamdani have shed new light on it by providing an analytical framework which seeks to make independent directors more effective in performing their oversight role. They convincingly argue that some independent directors should be accountable to public investors who, in order to achieve this aim, should have the power to influence the election or retention of several "enhanced-independence" directors. Starting from this persuasive outcome, and adopting a comparative and functional analysis, this Article will further extend the Bebchuk and Hamdani framework in several directions, with the aim of rendering it more effective and adaptable to different jurisdictions around the world. First, reliance only on the initiative of activist hedge funds might raise some concerns with regard to the effectiveness of enhanced-independence directors as monitors as well as to the cohesiveness of the board. This Article will therefore argue that the involvement of non-activist institutional investors in the selection and election of enhanced-independence directors should be enhanced. It will further argue that the refinement of the election and retention process for independent directors might not be enough in order to tangibly enhance their independence, as the "human nature" of corporate boards must be taken into consideration as well. Pursuing this line of thought, it will develop an in-depth analysis of strategies available in order to limit the distorting effects of the board’s relational dimension and to induce enhanced-independence directors to perform their oversight role in a truly independent way.