What good are independent directors?

Some good, and possibly quite a lot. A study of German companies, focused on the role that outside directors play on supervisory boards, threw up evidence that for innovation, the right outsiders can bring a lot of benefit. Three academics examined the patent applications of innovative companies to see if there was a link to the configuration of the boards. Supervisory boards can be quite distant from the business. They have no representation of senior management. Moreover, the German variety must also have half the seats in the hands of members of the ordinary workforce. So logically, you might think, such boards would serve a narrow, compliance function. That's not the place to expect to see new ideas getting knocked around, leading to the occasional stunning breakthrough. But this study shows a rather different story. Based on panel data of the largest German companies the econometric analysis they found a "robust and significant positive influence of external executives on innovative firm performance", as measured by patent applications. When the outside directors came from innovative companies patenting activities were higher. When people from non-innovative companies dominate, the opposite occurs. "The results indicate that outside board memberships can serve as a channel for scarce specific knowledge and expertise," they conclude. It's a conclusion a lot of directors would like to believe, too.

Source document: The research paper "Outside Directors on the Board and Innovative Firm Performance," by Benjamin Balsmeier , Achim Buchwald and Joel Stiebale of Nottingham University Business School, is a 50-page pdf file.