Truth in labeling? The 'independent director' tag doesn't tell us much.

AuthorKaback, Hoffer
PositionQUIDDITIES

MUCH INK has been consumed by commentary on the "non-independence" of the directors of News International Corp, Rupert Murdoch's company. Consider these examples:

* In the DealBook section of the New York Times, Andrew Ross Sorkin in mid-July wrote that the board "might as well be named 'Friends of Rupert.' " He added, "Of the 16 board members, nine are technically considered independent. But few would truly qualify under any definition of good corporate governance," Sorkin also quoted governance guru Nell Minow as calling News Corp. "the ultimate crony board." Another Times article in early August (Jeremy W. Peters, "For Murdoch, a Board Meeting with Friendly Faces") characterized the board this way: "a lot of familiar, friendly faces ... deep and longstanding ties to Mr. Murdoch, his company and his family ... a glaring example of how chumminess in the boardroom can allow and even contribute to mismanagement."

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* The Wall Street Journal ran a story in late July (Russell Adams and Joann S. Lublin, "News Corp. Board Challenged") noting that critics contend the board lacks "the independence it needs to ensure the mess is cleaned up properly."

* In a Harvard Business Review blog also in July, Lucy P. Marcus, CEO of Marcus Ventures, wrote that "the case of News Corp, and others like it, presents a clarion call to all nonexecutive board directors: it is time to step up, or step down,"

I have several times written about directors' independence. In "Pals on the Board" (Winter 1997), 1 emphasized that litmus-paper tests like whether a director was a past or current employee were not useful or meaningful. 1 particularly emphasized the mislabeling in the other direction: Just because a director "passes" checklist tests for independence does not at all mean that he is independent in fad.

In "More Ties Than Brooks Brothers" (Fall 2003), I discussed how Delaware Vice Chancellor Leo Strine's opinion in the Oracle case laid heavy emphasis on the psychological aspects of "mutual affiliations." 1 now add: Labels like "independent director" don't tell us about the presence or absence of important "mutual affiliations"; these may Indeed be undisclosed or hidden, not-withstanding the adornment of the label.

In "What's Underneath?" (First Quarter 2007), 1 maintained that superficial definitions of independence are faulty because a director can, for example, be the CEO's former college roommate but still pass muster under those...

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