Do outside independent directors strengthen corporate boards?

Abstract

Purpose

Recent changes in corporate governance require firms to maintain boards with a majority of outside independent directors. The belief seems to be that outside independent directors will strengthen corporate boards by monitoring the actions of management and ensuring that management decisions are made in the best interests of the stockholders. This belief, however, may be founded on an assumption that has its roots in public perception and not in fact. The purpose of this paper is to determine whether or not outside independent directors strengthen corporate boards.

Design/methodology/approach

Five areas within corporate boards of directors, including board composition, CEO duality, audit committees, compensation committees and nominating committees, are examined. The results of studies aimed at discerning the effects that outside independent directors have on increased firm performance and shareholder wealth through strong corporate governance are discussed.

Findings

The conclusion reached is that outside independent directors do appear to strengthen corporate boards; however, more needs to be done to reestablish the market's confidence in corporate America's ability to effectively govern itself.

Practical implications

Best practices are discussed that can assist corporate boards in fulfilling their responsibilities to shareholders in monitoring and controlling the actions of management.

Originality/value

This paper is of value to management of firms, corporate directors, and investors. It demonstrates that the presence of outside independent directors alone will not solve the deficiencies exposed in corporate boardrooms. It also highlights the fact that more needs to be done to change the environment in which corporate boards operate in order to better protect shareholder interests.

Citation

Petra, S.T. (2005), "Do outside independent directors strengthen corporate boards?", Corporate Governance, Vol. 5 No. 1, pp. 55-64. https://doi.org/10.1108/14720700510583476