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  • Paul W. MacAvoy,

    1. is the Williams Brothers Professor of Management Studies at the Yale School of Management.
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  • Ira M. Millstein

    1. is Senior Partner at the New York law firm Weil, Gotshal & Manges LLP and the Eugene F. Williams, Jr. Visiting Professor in Competitive Enterprise and Strategy at the Yale School of Management.
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      A longer, more technical version of this article appeared in Columbia Law Review, Vol. 98 (June 1998), pp. 1283-1322. This research has been funded by the John M. Olin Foundation program in government-business relations at the Yale School of Management and by Weil, Gotshal & Manges LLP. Olin Senior Fellows Karen Lamb and Gary Davison, assisted by SOM students Michael Asato and Mangesh Mulgaonkar, contributed materially to implementation of the research design. The authors wish to express their gratitude to the following scholars and experts in the field for their valuable input and insights: William J. Baumol, Holly J. Gregory, Jim Hawley, Thomas R. Horton, Tim Koller, Richard H. Koppes, Paula Lowitt, Chris McCusker, Richard A. Miller, Robert A.G. Monks, Alan J. Patricof, James Phills, Ned Regan, Martin Shubik, John G. Smale, Michael I. Sovern, Robert B. Stobaugh, Kenneth West, and Andy Williams. We would like to extend special thanks to Kayla Gillan, General Counsel of CalPERS; Richard H. Koppes, former General Counsel of CalPERS; and Kenneth West, Senior Consultant to TIAA-CREF, for providing us with access to governance data considered for analysis in this paper.


In recent years, boards of directors have become more active and independent of management in pursuing shareholder interests. But, up to this point, there has been little empirical evidence that active boards help companies produce higher rates of return for their shareholders. In this article, after describing the new board activism, the authors argue that past failures to document an association between independent boards and superior corporate performance can be explained by two features of the research: its concentration on periods prior to the 1990s (when most boards were largely irrelevant) and its use of unreliable proxies (such as a minimum percentage of outside directors) for a well-functioning board.

The authors hypothesize that an independent and resourceful board takes steps that require management to increase earnings available to investors. To test this hypothesis, the performance of a sample of large U.S. corporations was examined over the period 1991-1995 using two proxies for the “professionalism” of each company's board: (1) the letter grades (A+ to F) assigned by CalPERS for corporate governance; and (2) a “presence” or “absence” grade based on three key indicators of professional board behavior. Both of these governance metrics were associated in statistically significant ways with superior corporate performance, as measured by earnings in excess of cost of capital and net of the industry average. While acknowledging that such results do not prove causation, the authors conclude that, in the first half of the 1990s, corporations with active and independent boards added significantly more value for shareholders than those with passive, “rubber-stamp” boards.