The Holy Grail of Corporate Governance Reform: Independence or Democracy?
Cosenza, Elizabeth, Brigham Young University Law Review
Widely known in business and academic circles as a corporate governance guru, Robert Clark, a professor and former dean of Harvard Law School, recently found himself in the middle of a boardroom imbroglio.1 Mr. Clark joined the board of directors of media conglomerate Time Warner Inc. ("Time Warner") in January 2004 as an independent member. In May 2005, Mr. Clark also joined, as an independent member, the board of directors of Lazard Ltd. ("Lazard"), an advisory investment banking firm whose chief executive officer ("CEO"), Bruce Wasserstein, was a longstanding business associate and personal friend of Mr. Clark.2 Shortly after Mr. Clark's appointment to the Lazard board, Lazard began advising financier Carl C. Icahn and a group of dissident shareholders in a proxy battle to replace a majority of the board of directors of Time Warner.3
Although Mr. Clark's membership on the Lazard and Time Warner boards was in full compliance with the recently enacted regulatory reforms relating to director independence, his personal and professional relationship with Mr. Wasserstein, as well as the proxy battle between the two companies, raised serious questions about his ability to serve concurrently as a truly independent member of both boards.4 In December 2005, Mr. Clark resigned from the board of directors of Lazard to avoid any perception of a conflict of interest.5 The dilemma that led to his resignation is instructive. Mr. Clark is preeminent within both the business and academic communities as a corporate governance expert, thereby making him a seemingly ideal candidate for membership on any board of directors. More importantly, however, his resignation informs the ongoing debate regarding the desirability and practicability of independence-centered governance reform in the United States.6
Part II of this Article presents an intentionally selective list of the reforms enacted by Congress and the self-regulatory organizations ("SROs") relating to director independence following the corporate scandals of 2001 and 2002. The reforms proscribe primarily employment and other financial relationships between directors and management that many experts believe impair independence. Using the facts surrounding Robert Clark's recent high-profile resignation from the Lazard board, this Part explores whether independence represents a state of mind inherently invulnerable to corporate legislation or regulation, rather than being measurable by a director's job status or the existence of a financial relationship. With this conception of independence as a framework, Part II exposes the limitations of the existing statutory and regulatory landscape and casts doubt on the propriety of independence as the centerpiece of modern corporate governance reform in the United States.
The enactment of governance reform requires an understanding of the history of the debate concerning the appropriate role, if any, for an independent directorate in corporate governance. To that end, Part III of this Article sets forth the arguments that have been advanced both in favor of and against independent directors, as well as the theoretical predicate underlying the reforms' emphasis on independence. This Part frames the debate around the question of whether the statutory and regulatory reforms favor cosmetic form over functionality and thereby empower independent directors beyond their utility. Part III also considers the structural bias theory and cautions against overly simplistic generalizations relating to director bias.
While the federal reforms have elevated the issue of independence to the forefront of the corporate governance debate, recent Delaware jurisprudence has also sharpened the focus on the role of board composition generally-and in particular, on independent directors-for corporate governance reform.7 Part IV of the Article analyzes recent Delaware jurisprudence on director independence in both the special litigation committee ("SLC") and demand futility contexts. …