Independent (non-executive) directors have long been regarded as an essential corporate governance instrument in monitoring and disciplining the senior executives of listed companies, both in the UK and the US. However, large corporate scandals and the global financial crisis at the beginning of the 21st century have shown that independent directors have not entirely met the high expectations placed on them. Doubts about their effectiveness in holding the management to account have arisen.
On this occasion, this essay critically discusses the effectiveness of independent directors in monitoring and disciplining the senior executives in the UK and the US. By exploring the role of independent directors, particular attention is paid to the limitations of the current governance systems from a legal and practical point of view. It becomes clear that many of the shortcomings attributed to the concept of director independence have arisen precisely from the requirement to have a majority of independent directors on the board. The essay also presents proposals to improve the effectiveness of independent directors.
The essay is structured as follows. Section 2 explores the origins of independent directors in the UK and the US and answers the question why managers need to be monitored by (independent) directors. Section 3 then outlines the different standards and definitions of independence in the UK and US corporate governance systems. Subsequently, section 4 goes into more detail on the monitoring role of independent directors while stating the key components for effectiveness. Section 5 critically discusses the main limitations of independent directors in monitoring and disciplining the senior executives, followed by a series of proposals to improve their effectiveness. Section 6 concludes.
Inhaltsverzeichnis (Table of Contents)
- Introduction
- Origins of Independent Directors
- Why Managers Need to be Monitored by (Independent) Directors
- Rise of Independent Directors in the US
- Independent Non-executive Directors in the UK
- Definition of Independence
- The Monitoring Role of Independent Directors and Key Elements for their Effectiveness
- Independence
- Knowledge and Skills
- Incentives and Engagement
- Limitations on the Effectiveness of Independent Directors and Proposals for Improvement
- Appointment and Structural Bias
- Lack of Firm-Specific Knowledge and Expertise
- Information Asymmetries
- Time Constraints and Multiple Directorships
- Influence of Board Tenure on Independence
- Free-Riding Problems
- Incentives and Remuneration
- Lack of Board Diversity
- Liability and Accountability
- Conclusion
Zielsetzung und Themenschwerpunkte (Objectives and Key Themes)
This essay critically examines the effectiveness of independent directors in overseeing and disciplining senior executives within UK and US corporations. It explores the historical context of their emergence, the current limitations of the system, and proposes solutions to enhance their effectiveness.
- The role of independent directors in corporate governance
- The separation of ownership and control in publicly traded companies
- The limitations of independent directors in monitoring and disciplining senior executives
- The effectiveness of current governance systems in achieving board independence
- Proposals to improve the effectiveness of independent directors
Zusammenfassung der Kapitel (Chapter Summaries)
The essay begins by explaining the origins of independent directors in the UK and US, highlighting the need for oversight of senior executives in corporations due to the separation of ownership and control. It then defines independence as a key concept in corporate governance and outlines its importance in the monitoring role of independent directors. The essay then explores the limitations of independent directors, including structural biases, lack of expertise, information asymmetries, time constraints, and free-riding problems. Finally, it proposes a series of solutions to improve their effectiveness, focusing on enhancing knowledge, skills, incentives, and board diversity.
Schlüsselwörter (Keywords)
The essay focuses on the role of independent directors in corporate governance, examining their effectiveness in monitoring and disciplining senior executives. It delves into issues related to board independence, corporate governance codes, legal frameworks, and the limitations of the current system. The essay also explores concepts such as information asymmetries, incentive structures, and the challenges of achieving true independence within corporate boards.
- Quote paper
- Thomas Böhm (Author), 2019, A critical discussion of the effectiveness of independent directors in monitoring and disciplining the senior executives in the UK and the US, Munich, GRIN Verlag, https://www.grin.com/document/489595
