RulesandTrust 197orientation, however, its valuation should be discounted proportion-
ally.
Most corporate governance reforms fail to solve governance
problems, and some exacerbate them. Nevertheless, institutional in-
vestors and other shareholder advocates have promulgated a variety
of policies about corporate governance, most of which are designed
to promote an owner orientation. But just as fads infect finance,
they gum up governance too.
Perhaps the most popular governance idea in the past couple of
decades has been the call for independent boards of directors. The
National Association of Corporate Directors (NACD) and many in-
stitutional investors including CalPers and TIAA-CREF, urged that
corporate boards be composed of at least a majority of outside di-
rectors, those without employment or other affiliation with the cor-
poration. The idea was that this would strengthen directorial spines
to keep management in check. Nearly all major companies fell into
line, with 90% of Fortune 1000 companies having a majority of in-
dependent directors.
These arguments were made on the basis of intuition, however,
rather than analysis. It was as if there were little or no doubt that
managers needed to be kept in line and that director watchdogs
could do the trick. This premise has been exploded by several studies
showing that far from independent boards enhancing economic per-
formance, there is actually a negative correlation between the degree
of independence and financial results.^3
This is not to say that having some or many independent direc-
tors is never desirable (Buffett, for example, believes that most di-
rectors should be outsiders),^4 but there is no reason to give credit
ipso facto to a company just because it does this. The unanswered
commonsense questions are: (1) Who are these independent direc-
tors? and (2) What value do they add to the boardroom? Independent
directors famous for international diplomacy or senatorial jobbery
may be far worse to have at the table than a chief financial officer
with extensive industry and managerial experience. A template that
calls for independence is not a virtue but a mirage.
The key is to choose directors for their business savvy, interest
in the job, and owner orientation. To be avoided are celebrity direc-
tors and others who are chosen for nonfundamental reasons, such
as adding diversity or prominence to a board.
Another popular move some companies fell for was the push to
split the functions of the company’s CEO from those of its board