Strangers in the House: Rethinking Sarbanes-Oxley and the Independent Board of Directors

Citation data:

Delaware Journal of Corporate Law, Vol. 32, No. 1, pp. 33-72, 2007

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Eric Fogel; Andrew M. Geier
delaware; journal; corporate; law; fogel; geier; governance; paradigm; inverted; independant directors; reform; oversight shareholders; safe harbor; Sarbanes-Oxley
paper description
This article argues that the corporate governance paradigm for boards of directors is inverted: shareholder-owners should be in the majority and independent directors should be in the minority. The Sarbanes-Oxley Act gives short shrift to the role and efficacy of inde-pendent directors by focusing on the independence of auditors and internal controls. In reviewing the history of boards of directors, the authors suggest that boards represent an intermediary process to buffer corporate managers from the shareholder-owners to whom they are supposedly accountable. The authors researched 254 public companies across 50 industries and found, consistent with other significant econo-metric research in the area, inconclusive evidence that boards dominated by independent directors increase financial performance for shareholders. Consequently, the authors propose three reforms to Sarbanes-Oxley that would facilitate the participation of larger, longstanding owners, oversight shareholders, serving on boards of directors and include safe harbors for insider trading liability and controlling party liability. Additionally, the authors propose that Sarbanes-Oxley be amended to facilitate the ability of these oversight shareholders to call shareholder meetings, which would serve as the most effective check and balance on management.