2.4.1 Disinterested outsider model

Definitions in this group focus on the lack of financial ties to the company, because NEDs are more likely to serve shareholders well when they do not have a financial interest in certain transactions or in the company in general (Harvard Law Review Note 2006: 1555-1556). These disinterested outsiders are not dependent on the CEO for promotion, do not suffer from conflicts of interest and are therefore better able to protect shareholders’ interests (Monks and Minow 1995: 203). However, the risk may appear that a disinterested outsider becomes indifferent (Monks and Minow 1995: 203). By summing specific financial and business ties, regulators offer a checklist to determine whether a NED can be qualified as independent (Harvard Law Review Note 2006: 1556). The proposed definition of the High Level Group of Company Law Experts, Recommendation 2005/162/EC of the European Commission and the corporate governance codes of the countries in Part II of this study all have their independence definition accompanied by a list of independence criteria. Therefore, they fit in the disinterested outsider model. The lists of these criteria cannot be exhaustive, and therefore it might occur that a disinterested outsider is independent in form, although he is not independent in fact or in appearance. Examples of such situations are given in section 2.3.

The emphasis on financial and business ties distracts the focus from other sources of conflicts of interests, such as social ties (Harvard Law Review Note 2006: 1557). Brudney notes that ‘[n]o definition of independence yet offered precludes an independent director from being a social friend of, or a member of the same clubs, associations, or charitable efforts as the persons whose compensation or self-dealing transactions he is asked to assess” (1982: 613).

Despite extensive lists of ties that can label a director as non-independent, executive directors can, with very little difficulty, find NEDs that are independent in form (and maybe in appearance), but still rubberstamp almost any proposal from executive directors (Conard 1988: 129). Another often raised problem is that disinterest does not necessarily coincide with ability and knowledge to monitor management effectively (Harvard Law Review Note 2006: 1557).