Academic

Lisa's post earlier today sent me to the Fortune article she quoted and then led me to reflect on whether one can put a price on independence.  The article takes $213,000 as the norm for independent director compensation.  It then searches out cases where board compensation well exceeds that baseline, starting at the "nosebleed" level of $400,000 and going on up.  A few firms are singled out, like Chesapeake Energy, which awarded its outside directors an average of $670,000 in fees, with one director (the 79 year old cousin of the CEO) receiving $784,000.  The article suggests that these hefty payouts are really payback for the board, which "rac[ed] to the rescue [of the CEO] like corporate first-responders," awarding him a total of $100 million in compensation after a combination of a slump in stock price and margin calls had "clobbered" said CEO's net worth. 

The implication is clear from the article's first paragraph: a board member can't really be independent when she is "being paid oversize amounts likely to be important to his or her lifestyle." 

Well, hold on a minute!  I take the author's point, that Chesapeake Energy is paying its independent directors way more than normal.  But what about firms that pay under the "nosebleed" level?  Surely a six-figure income would be "important" to some independent directors' lifestyles.  Assessing the relative impact of income on a director's lifestyle as a way to gauge likely independence from the CEO seems a dangerous business.  In the Disney litigation the Delaware Chancery Court refused to consider whether a Disney board member who was an elementary school principal lacked independence based on her receipt of director fees.  The Court observed that to hold otherwise would be ?to discourage the membership on corporate boards of people of less-than extraordinary means. Such ?regular folks' would face allegations of being dominated by other board members, merely because of the relatively substantial compensation provided by the board membership compared to their outside salaries.? 

And doesn't anyone remember that post-Enron reformers urged that directors fees be raised to, in the words of Richard Breeden, WorldCom's corporate monitor, "reflect both the time commitment and risks for directors" ?  Breeden recommended fees of at least $150,000 (most of it in cash to avoid the distorted incentives that a large option award creates) for that service on that company's board.  This in 2003.

I've been skeptical of the value of independent directors, at least as the terms is commonly used in corporate governance, for a while.  But if we're going to have them, parsing their independence based on fees seems pretty subjective.