Posted by Da Lin (Harvard Law School), on Wednesday, March 13, 2019
Editor's Note: Da Lin is Lecturer on Law at Harvard Law School. This post is based on her recent article, forthcoming in the Journal of Corporation Law. Related research from the Program on Corporate Governance includes Independent Directors and Controlling Shareholders by Lucian Bebchuk and Assaf Hamdani (discussed on the Forum here).
Corporate law has long been concerned with director independence. In controlled companies, the perceived problem is that directors might feel pressured to reciprocate a past kindness from the controlling shareholder or fear retaliation. As a result, the conventional marker of independence is the absence of substantial prior or ongoing relationships to the controlling shareholder.
In my forthcoming article, Beyond Beholden, I challenge that standard narrative. I argue that the prospect of future rewards from the controlling shareholder also influences director behavior. Simply put, directors may be motivated to be on good terms with controlling shareholders because controlling shareholders may reward them in return.