Can Any Board Member Ever Be Truly Independent? Warren Buffett, among others, says "no.".

• Author: Hall, April

Both the NYSE and Nasdaq require the boards of listed companies to have a majority of independent directors and audit committees that are composed solely of independent board members.

But there is an argument about what makes a board member independent. Technically, independence means that the director has no "material relationship" to the business that could present a conflict of interest in performing their duty to represent all stakeholders. Those relationships include being an employee of the company or a partner of the company (distributor, supplier, etc.).

Leo Strine, Jr., the former chief justice of the Delaware Supreme Court, says that the question of independence and the equally important question of effectiveness are deeper than often recognized, especially when independent directors have no prior connection as a stockholder to a company before they serve. Relevant issues include which other boards they serve on and where they lack relevant industry expertise.

"CEO pay was way, way lower when boards didn't have as many independent directors," Strine says. "And the board itself is expensive for companies. The median director pay was over $200,000 the last time I looked and I'm sure is well in excess of that now.

Given that many independent directors serve on more than one board and director pay has increased so much, the reality is that many of them do care about staying on boards and being acceptable to institutional investors and proxy advisory firms and other independent directors.

In a 2020 letter to Berkshire Hathaway stockholders, chairman and CEO Warren Buffett said that high rates of compensation can discourage independent directors from being a challenging voice in the boardroom.

"Is it any wonder that a non-wealthy director ("NWD") now hopes--or even yearns--to be asked to join a second board, thereby vaulting into the $500,000-600,000 class?

"To achieve this goal, the NWD will need help. The CEO of a company searching for board members will almost certainly check with the NWD's current CEO as to whether the NWD is a 'good' director. 'Good,' of course, is a code word. If the NWD has seriously challenged his/her present CEO's compensation or acquisition dreams, his or her candidacy will silently die.

When seeking directors, CEOs don't look for pit bulls. It's the cocker spaniel that gets taken home.

Similarly, Lucian Bebchuk, the James Barr Ames Professor of Law, Economics and Finance and director of the program on...