Corporate Governance & Organization Life Cycle: The Changing Role ...

investors is an interesting response to the issue of the split ownership and power raised by Berle and Means in 1932. As was discussed, these authors considered that the power of control attached to ownership is ineffective due to the fact that share ownership is scattered among many shareholders. It appears that the market is bringing an end to the inefficiencies caused by this artificial split.

1.2.3. Board Composition: The Shift Toward
a More Independent Board

The composition of listed companies’ boards has also changed over time. In their study, Baysinger and Butler (1985) analyzed a sample of 266 large firms, and they found that in 1970 only 20% of their board members were independent directors. By 1980, the proportion of independent directors in their sample had risen to 31%, although the average size of the boards over the same period had remained unchanged.

The trend toward more independent board members continued unabated in the early 1990s (Bhagat & Black, 2002). These authors noted that by 1997, the average number of inside directors at the Standard & Poor (S&P) 500 firms had gone down from 3 to 2. Furthermore, 56% of the firms included in this index had only 1 or 2 inside directors. On this point, they posited that the long-term shift in board structures might have been a response to legal pressures. Indeed, by giving greater deference to majority-independent boards, the influential Delaware Supreme Court may have encouraged the trend toward more independence. For instance, in Unocal v. Mesa Petroleum (1985), the court stated that judicial deference to a board’s decision to oppose a takeover is “materially enhanced” when a majority of the corporation’s outside directors approve a defensive measure (Ritter, 1986). Research done by Kesner and Johnson (1990) confirmed that firms with a higher proportion of inside directors are subject to more shareholder lawsuits. This research raised some important issues for board composition. If the shift in board composition is a response to legal pressure by certain stakeholders, then linking it to firm performance may not be helpful for two reasons. First, the primary objective of legal pressure is