What's Good for the Goose? A Critical Essay on 'Best Practices' for Private Firms

University of Maryland Journal of Business and Technology Law, Forthcoming

Lewis & Clark Law School Legal Studies Research Paper No. 2008-1

48 Pages Posted: 23 Jul 2007 Last revised: 8 Feb 2008

See all articles by Jennifer J. Johnson

Jennifer J. Johnson

Lewis & Clark College Paul L Boley Library

Abstract

While the regulation of internal corporate governance has historically been the exclusive province of state law, federal mandates now require independent directors to play the central role in the oversight of American corporations. While the federal regime primarily applies to public companies, some provisions, including the requirement of independent directors, are now touted as "best practices" for private entities as well. This paper suggests that this trend is ill-advised given the different roles that outside directors play in closely held firms. Whatever the virtues of independent directors as effective board members of public corporations, this is not a situation where what is good for the goose is necessarily good for the gander. In the private realm, the primary function of a board is advising, not monitoring. The federal mandates constraining the definition of director independence may unduly hamper the development of many private entities. Unlike the emerging federal regulatory scheme, state statutes rarely dictate board composition. State law provides incentives, however, for corporations to utilize independent directors by providing more deferential or limited judicial review of certain decisions made by independent board members. The state law definitions of "independence" are contextual but like their federal counterparts, the state definitions often miss the mark in dealing with private entities. This essay evaluates the appropriate definition and role of independent directors in the context of private companies and suggests that true independence is not only illusory in such circumstances, but perhaps counterproductive to the best interests of the firm. This essay claims that for private entities, the choice of individuals to serve as outside directors should not be dictated by federal concerns, nor should the decisions of these nominally independent directors automatically enjoy the presumptions and protections now afforded under state law.

Keywords: independent directors, corporate governance, private firms, closely held business entities

JEL Classification: K22,M13

Suggested Citation

Johnson, Jennifer J., What's Good for the Goose? A Critical Essay on 'Best Practices' for Private Firms. University of Maryland Journal of Business and Technology Law, Forthcoming, Lewis & Clark Law School Legal Studies Research Paper No. 2008-1, Available at SSRN: https://ssrn.com/abstract=1002422

Jennifer J. Johnson (Contact Author)

Lewis & Clark College Paul L Boley Library ( email )

10015 S.W. Terwilliger Blvd.
Portland, OR 97219
United States

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