Independent directors and controlling shareholders around the world

In this paper, we examine independent directors as a legal transplant from dispersed ownership systems to other systems where controlled corporations are prevalent. We focus in particular on Continental Europe countries, Japan and the BRICs. Our main thesis is that independent directors have a different and relatively narrower role to perform in controlled corporations. We also argue that in the law and practice of controlled corporations independent directors often play an even weaker role than economic theory would predict. In order to prove our thesis, we explore legal regimes applicable to independent directors across countries. We find out that the notion and functions of independent directors vary remarkable across our sample jurisdictions. Independent directors have often a role to play in audit committees and, less frequently, in nomination and remuneration committees. Conversely, in many jurisdictions they are not involved in the vetting related-party transactions and other conflict-of-interest operations. Also, some core functions of independent directors in diffuse ownership companies - such as the hiring and firing of managers and the setting of their remuneration - are performed by controlling shareholders. Moreover, in some countries, the role of independent directors is not defined in detail, so that it is not easy to distinguish in practice between independent directors and other non-executive directors (and to some extent also between independent directors and statutory auditors, when present). On the whole, the weak regime applicable to independent directors, particularly outside the Europe, generate that impression that several jurisdictions only pay lip service to the concept of independent directors as a central governance mechanism in listed companies.