Out of Sight Out of Mind: The Case for Improving Director Independence Disclosure

Director independence is a cornerstone of modern corporate law. Independent directors are entrusted with objectively and impartially monitoring management and ensuring that the interests of shareholders are well served. But translating the notion of independence into practice is far from a simple task, and while regulators and stock exchanges have tackled this elusive standard in different ways, for the most part their attempts have come up short. Currently, boards designate themselves as independent, and as this Article demonstrates empirically, they provide little information to investors regarding the considerations that supported their designation. Regulating director independence is at heart a means of empowering investors to make informed decisions about where to invest and how to vote. The current regime of regulating director independence is blind to this function. It shuts investors out of the process, allowing boards to designate their own independence with virtually no transparency or investor oversight. This lack of information is particularly concerning considering the importance of effective disclosure on capital markets. To that end, the SEC has recently requested input on means to improve its current disclosure rules under regulation S-K. This Article is a response to that request. It argues that investor accountability is a core function of regulating director independence and uses a theoretical framework and empirical findings to assert that the current system fails to achieve this end. The Article then proposes regulatory reforms aimed at a shift towards an enhanced disclosure regime.