Beyond Window-Dressing: Antecedents And Consequences Of “Independent” Directors Selection

Abstract

The passing of the Sarbanes-Oxley Act has witnessed the increasing of board independence among U.S. companies as they respond to the regulatory change by adding independent directors on their board. While supporters of Sarbanes-Oxley Act view the regulatory change as a positive step, skeptics perceive the rise of outsider representation on boards are nothing more than window dressing, as managers could appoint directors who comply to the definition of independent but are still under the management’s influence. We examine a panel of 2,736 U.S. public listed firms over 1999 to 2010 and found strong evidence that such “independent” directors selection is driven by the board’s need for control and advice in complex high information firms. The results suggests that firms respond to regulatory pressures while balancing the need for directors with firm-specific knowledge by appointing outside directors with prior ties to the incumbent board.