The Growing Clout of Independent Directors
Shepherd, Bill, Global Finance
Independent outside directors are appearing on more and more boards of major US companies. Not only do they bring fresh perspectives on business policies and strategies, but institutional investors increasingly want to see independent viewpoints on a board before they're comfortable owning the stock.There's a downside, however: Independent directors can turn around and bite you.
Take the case of Charles M. Elson, a professor at Stetson University's college of law whose study on the correlation between independence and remuneration led companies to begin paying directors in stock. One of the first to jump on the idea was Alfred J. Dunlap, who was then turning around Scott Paper. When Dunlap took the helm of Sunbeam, he invited Elson onto his board. Elson bought his shares with his own money. When Sunbeam faltered-and its shares tumbled-it was Elson who introduced the motion to dump Chainsaw Al.
Elson was also a dissident director at Circon, whose board he left in January after the company was sold to Maxim Medical. He was subsequently nominated to the board of Houston's Nuevo Energy by Relational Investors, which manages money for California Public Employees' Retirement System (Calpers), the biggest US pension fund and a major advocate of better corporate governance at US companies. Elson is typical of a new breed in US business: a professional outside director expert in corporate governance whose board positions are often gained at the insistence of major investors.
The trend is most advanced in the United States. Not far behind is Britain, which was wracked by a series of corporate scandals and collapses at the end of the 1980s boom-especially those involving Robert Maxwell and Asil Nadir of Poly Peck. London's financial community turned to former Cadbury Schweppes chairman Sir Adrian Cadbury to devise corporate governance standards in 1992 that became known as the Cadbury Code.
Now the corporate governance (and independent board member) movement is gaining ground in Europe, especially the core euro bloc countries of France, Germany, and the Netherlands. "The future of European capitalism depends in part on the rise of professional independent board members," says Steven Davis of Davis Global Advisors in Boston, a leading adviser on international corporate governance. Elsewhere there's little sign of interest in outside directors-a twitch or two in Latin America, none at all in Asia.
One problem is definitions: Just what constitutes independence? "Some people are independent on paper but not in meetings, notes Sophie L'Helias, a corporate governance adviser in Paris who is now working in Washington as well. Says Alexandra Lajoux, who runs publications at the National Association of Corporate Directors in Washington: "We've collected about a dozen different definitions of independence."
Under the two-board system used in Germany and the Netherlands, members of the supervisory board, as opposed to the management board, are by definition nonexecutive directors. …