BY ROBERTA S. KARMEL, Centennial Professor of Law Co-Director, Block Center for the Study of International Business Law Brooklyn Law School IS THE INDEPENDENT DIRECTOR MODEL BROKEN? 1

What is an independent director? 2 The difference between an interested and independent director. The Securities and Exchange Commission (SEC) ideal. The function of an independent director. Compliance Challenge to the CEO Responsiveness to Shareholders The relationship of the model to shareholder primacy

Implementation of the SEC’s Views 3 The 1970s Corporate Governance Hearings and Rules The 1980s Merger Mania Investment Company Governance The 1940 Act and 1970 amendments The 2001 SEC rules The 2004 SEC rules Sarbanes-Oxley Reforms Dodd-Frank Reforms Compensation Committees Bank Holding Company Risk Committees Rating Agency Boards

Problems with the Model 4 The monitoring/compliance model leads to boards that may become too risk adverse Directors are part-timers dependent on management for information Independent directors did not prevent the tech bubble or the 2008 meltdown The board room should not become an adversarial institution Command and control rules make flexible models difficult

Shareholder primacy and other models 5 Shareholder primacy raises too many issues Which shareholders should govern board decisions? Short term focus has led to destruction of long-term values Focus on share price led to the 2008 meltdown The Board Primacy Model May not be consonant with the law May not be consonant with public policy Stakeholder Theory In state law but in the context of takeovers Benefit and flexible purpose corporations Bank boards and duty to creditors

Corporate Governance Abroad 6 Europe Single tier and two tier boards Is a controlling shareholder independent? Debates about competence and diversity China and Hong Kong The problems of the government as majority shareholder The problems of a family group as majority shareholder

Questions for Discussion 7 How Should the Independent Director be Defined? What is the Purpose of the Model? What are its weaknesses and how can they be remedied? Is the shareholder primacy model flawed? Should directors have a duty to creditors? Should directors have a duty to the company? What does that mean? How should competence and expertise be evaluated? Is diversity important and how should it be achieved?

Who Should Govern the Board Room? 8