2007 • Volume 32 • Number 1

Strangers in the House: Rethinking Sarbanes-Oxley and the Independent Board of Directors

Eric M. Fogel and Andrew M. Geier 

This article argues that the corporate governance paradigm for boards of directors is inverted: shareholder-owners should be in the majority and independent directors should be in the minority. The Sarbanes-Oxley Act gives short shrift to the role and efficacy of independent directors by focusing on the independence ofauditors and internal controls. In reviewing the history of boards of directors, the authors suggest that boards represent an intermediary process to “buffer” corporate managers from the shareholder-owners to whom they are supposedly accountable. The authors researched 254 public companies across 50 industries and found, consistent with other significant econometric research in the area, inconclusive evidence that boards dominated by independent directors increasefinancialperformancefor shareholders. Consequently, the authors propose three reforms to Sarbanes-Oxley that would facilitate the participation of larger, longstanding owners, “oversight shareholders, “serving on boards of directors and include safe harbors for insider trading liability and controlling party liability. Additionally, the authors propose that Sarbanes-Oxley be amended to facilitate the ability of these oversight shareholders to call shareholder meetings, which would serve as the most effective check and balance on management.