Independent Directors

Abstract

Over the last twenty-five years the boards of directors of large US public companies have come increasingly to contain a majority of independent directors. In the literature on corporate governance, directors are categorized as inside directors (persons who are currently officers of the company), affiliated outside directors (former company officers, relatives of company officers, and persons who have or are likely to have business relationships with the company, such as investment bankers and lawyers — all these sometimes called grey directors) and independent directors (outside directors without such affiliations). Bhagat and Black (1997) find that more than two-thirds of the 957 largest US public corporations in 1991 had boards with a majority of independent directors. They also find that the median firm in this sample of 957 firms in 1991 had an eleven member board, which includes seven independent directors, one affiliated outsider, and three insiders (typically including the chief executive officer and chief financial officer). The median of three inside directors in 1991 might be as low as two today, due to changes in this period in the composition of a typical board.