Have we taken independence a step too far? It is plausible that the mandate for director independence is overdone. Here's where we may have gone wrong.

• Author: Lorne, Simon M.
• Position: ROLE OF THE BOARD

FOR SOME YEARS NOW, and with increasingly frequent applications of the principle, we have come to view the independence of corporate directors as a panacea for virtually every perceived corporate governance ailment. Corporate fraud? Make boards have more independent directors and make the audit committee wholly independent. Dysfunctional compensation structure? Require that the compensation committee have a majority of independent directors. The list of questions to which independence seems the answer is lengthy.

But can independence really cure so many ills? While there are unquestionably significant values that accompany independence, is it possible that we're just putting too much weight on it?

The origins of this attachment to independence as a curative element for all manner of corporate ailments may be lost in antiquity--certainly one can see traces of it in the strengthening of auditor independence requirements following the SEC's McKesson & Robbins investigation in 1940--but the thought was unquestionably flourishing when the Congress adopted the Sarbanes-Oxley Act following the uncovering of the Enron/WorldCom/Adelphia litany of scandals. That statute strengthened the independence of auditors, established independence standards for board audit committees (in a rather convoluted manner, requiring the SEC to adopt rules requiring national securities exchanges to prohibit listing of companies that did not comply with them), and in other ways mandated concepts of independence in pursuit of improved corporate behavior.

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But is that effort really appropriate? Consider two contrary suggestions.

Berkshire Hathaway and Enron

First, consider Warren Buffett's Berkshire Hathaway. It has long been one of the most admired corporations in the firmament, and justifiably so. Over a very long period of time the company has consistently delivered superior results for its investors, while carefully treating them as partners. In the chairman's annual letters to stockholders over the last 40 years, Mr. Buffett has provided a thorough and honest assessment of the company's activities, in a manner that few other CEOs have been willing, or able, to emulate.

Recognize, though, that as recently as 2002, when Sarbanes-Oxley was adopted, the Berkshire board was comprised of seven directors, only three of whom could be considered at all independent; indeed, even one of those three was the lead partner in Berkshire's principal outside law...