Big Name Directors Sanction Runaway CEO Compensation: Delaware Journal of Corporate Law Publishes Challenge to Sarbanes-Oxley, Offers Solutions Law Firm's Study Finds No Evidence That Independent Directors Enhance Shareholder Returns

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"Do boardrooms dominated by independent directors improve financial performance for shareholders--or hinder it?" Eric Fogel, a senior partner with Schuyler Roche & Zwirner, a Chicago-based law firm, recently asked this question in exploring the efficacy of the Sarbanes-Oxley Act of 2002, the federal law requiring publicly traded companies to improve accountability and internal controls.

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Our research indicates there is no empirical data to support the notion that super majority independent boards increase financial performance for shareholders. If the real purpose of independents is to act as wise referees in the event of conflicts, then it does not take a majority of board members to sort this out--it usually takes only three.

    Seeking an answer, Fogel recruited colleague Andrew Geier, and together they researched historical data on 254 public companies across 50 industries, ultimately concluding the corporate governance paradigm guiding most boards of directors is the reverse of what it should be.

Fogel and Geier's findings and conclusions are featured in the Winter 2007 issue of the Delaware Journal of Corporate Law. Their article, "Strangers in the House: Rethinking Sarbanes-Oxley and the Independent Board of Directors," argues that rather than foist outside directors on boardrooms, the SEC, the New York Stock Exchange and NASDAQ should promote a model whereby shareholders comprise the majority of public company boards, and independent directors comprise the minority.

"So-called independent directors did not avert the staggering corporate scandals of recent memory," said Fogel. "Consider Adelphia, Enron, WorldCom and Hollinger, that boasted a vanity board on which sat former Secretary of State Henry Kissinger, among other luminaries. It stands to reason that shareholder-owners--not disinterested non-owners--would demonstrate greater zeal in monitoring management of the companies they own and should therefore comprise a majority of a public company's directors. Owner-shareholders are the most efficient profit maximizers. They'll ask the tough questions and probe because it's in their interest to do so. All shareholders will benefit as a result."

The psychology of self-interest illuminates Fogel's contention that the existing paradigm for corporate governance should be inverted. What is the incentive for an outside director, paid a fixed fee despite corporate performance, to challenge a public company's finances or the company's CEO? Where is the impulse to deflate ballooning executive pay when many outside directors are closely tied to leadership? When a D&O policy frees outside directors of liability, where is the inducement to challenge existing management? These and other questions, Fogel and Geier believe, point to one conclusion; to tip the balance of corporate governance by aligning power with owners, not outsiders.

"We found no hard evidence that outside board members increased financial returns to shareholders," Fogel stated. "Our research indicates there is no empirical data to support the notion that super majority independent boards increase financial performance for shareholders. If the real purpose of independents is to act as wise referees in the event of conflicts, then it does not take a majority of board members to sort this out--it usually takes only three."

Fogel and Geier agree that Sarbanes-Oxley was a quick fix in reaction to public scandals, and one that is proving cost prohibitive and ineffectual for American companies eager to compete in the global marketplace. The reforms they propose are designed to pave the way for greater participation by longer-standing "oversight shareholders"--allowing owners to serve on boards of directors and enjoy safe harbors against such liabilities as ERISA, tax, insider trading and controlling party liability.

Fogel and Geier recommend that governmental and regulatory governing bodies do three things:

(1) amend the public company manuals for the NYSE and NASDAQ to encourage greater owner/shareholder participation on boards;

(2) enact safe harbors in SEC laws for oversight shareholders of public companies (i.e., those holding more than 1% ownership for at least 6 months) in the areas of: inter-shareholder communication, controlling party liability for tax, ERISA and other issues, and trading liability for trading plans filed in advance; and

(3) encourage public companies to utilize the latest technology to facilitate owner inquiry and communication.

No doubt these reforms and others Fogel and Geier propose will generate debate not only within the legal community but in the halls of Congress and in boardrooms across the nation.

FOR A COPY OF THE ARTICLE OR COMPLETE AUTHORS BIOS CONTACT:

Spencer Maus - 312-397-1960 or email jsmaus@jaseinc.com

Al Martin - 773-252-0758 or email amartin@whatworkscomms.com

About Schuyler Roche & Zwirner, P.C.

Schuyler, Roche & Zwirner (SRZ) is a midsize law firm by design, with roots in the 19th century. Its size and status better enable it to retain quality attorneys who partner with clients and colleagues effectively and cost-efficiently. SRZ concentrates in business enterprise, corporate litigation, and estate management. Serving seasoned businesses and startups both here and abroad, SRZ enjoys a hard-won reputation for aggressive business defense litigation and counseling. It has cultivated an estate management team well respected in planning for wealth and in bridging generations. Whether defending, prosecuting or avoiding litigation, managing mergers and acquisitions, obtaining loans and venture capital, counseling on federal securities law, or securing private placements, SRZ has helped loyal and new clients not only thrive, but oftentimes expand into the international marketplace. Its services in asset securitization and structured finance are firmly established, and its legal expertise in commercial litigation, employment, technology, and real estate helps benefit both individuals and companies. NOTE: Eric M. Fogel will be speaking on the topics of his article to the Chicago Bar Association Corporation and Business Law Committee April 4, 2007.

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Spencer Maus
Schuyler, Roche & Zwirner
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