Corporate Directors Essay

One potentially important characteristic of corporate directors is whether they are “independent.” Based on our readings this term, does academic research find that independent directors are truly independent?

An independent board of directors is one that is focused in maximizing the interests of shareholders. However, most often than not even a board that seems independent as it does not have conflicts of interests is usually working to satisfy interests of other parties other than the shareholders. Other stakeholders such as creditors and institution owners also play a huge role in how a board of directors manages and makes decision regarding a firm. Corporate governance mechanisms help reduce conflicts of interests which lead to positive effects such as reduced liquidity risks having a positive influence on bond holders. In spite of this, companies whose ownership mostly comprises of institutions, tend to have a less independent board of directors as the institutions have a lot of influence on how decisions are made.

A seemingly independent board of directors may also be not so independent due to factors arising from credit financing. Firms are constantly being run in order to suit the interests of creditors who play an invaluable role especially during times of financial distress where a company may require restructuring. The board is the forced to work alongside the needs of creditors rather than shareholders. As much as all efforts are made to maximize profits for the benefit of shareholders, there are times when creditors can mount pressure on the managers and chief executive officer turn over. Creditors therefore can indirectly influence the company’s behavior through imposing regulations on issuance of debt, financial agreements and capital expenditures. These affect the most vital functions of a corporation such as the financing and investment.

In conclusion, a board of directors might try to be independent by ensuring that all conflicts of interest are at a minimal, nevertheless other stakeholders will still influence the decision making process making it not very independent.

Works Cited
Greg Nini, David. C. Smith, Amir Sufi. “Creditor Control Rights, Corporate Governance, and Firm Value.” The Review Financial Studies (2013): 25.
Sanjeev Bhojraj, Partha Sengupta. “Effect of Corporate Governance on Bond Ratings and Yields: The Role of Institutional Investors and Outside Directors.” Chicago Journals (2013): 455-475.