In the decade after World War II, 75% of board directors of an average American public company were employed by or affiliated with the company in some way. They were “inside” or “non-independent” directors.
The Case for More Company Insiders on Boards
Empirical studies have largely found no connection between board independence and company performance outcomes.
September 30, 2024
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Summary.
Until the 1970s, corporate boards were dominated by inside directors — people employed by or affiliated with the company in some way. As of 2023, Spencer Stuart research found that 85% of directors are independent. The switch came in response to a number of trends, including the distrust of American institutions after Watergate and Vietnam, and SEC rule changes that increased the importance of independent directors. However, with few exceptions, empirical studies have found no connection between board independence and company performance outcomes Business leaders should reconsider the merits of inside directors, who 1) bring a deeper understanding of the company, its strategy, R&D opportunities, and market competitors; 2) have a deeper stake in the company’s long-term success, as their professional reputations and continued employment depend on it; 3) are less likely to look to the company’s current share price as a guide to how the company is doing; and 4) create a balance of power on the board, as opposed to only giving the CEO confidential and unfettered access.