Social Ties in the Boardroom: Changing the Definition of Director Independence to Eliminate “Rubber-Stamping” Board – Note by Rachel A. Fink

From Volume 79, Number 2 (January 2006)
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The new millennium ushered in a parade of corporate scandals. The succession of scandals, which began with the collapse of Enron, revealed a deep-seated pattern of disregard for shareholders’ interests. In response to these events and the widespread public outcry that ensued, Congress examined corporate board structure and senior management and passed the Sarbanes-Oxley Act (“SOX”) in 2002 to try to remedy problems of accountability. Even after SOX was passed, corporate governance experts continued to study the role of a board of directors and how that role may be modified in order to prevent future scandals and to protect shareholders adequately. They have analyzed many aspects of the board, ranging from the size, to whether the chief executive officer (“CEO”) should be the chairman, to the importance of truly independent directors.

True director independence is the critical inquiry. An independent director is a type of gatekeeper, providing a check on the CEO’s power, evaluating and criticizing business decisions, and ultimately protecting shareholders’ interests. All of the companies involved in the recent corporate scandals shared one characteristic – they had directors who were not truly independent.