How Independent Directors Bridge the Information Gap

In the realm of corporate governance, recent research has confirmed a finding that should instinctively make sense: When a company’s board has a higher proportion of independent directors, the company itself behaves in a more transparent way.

What’s less obvious is whether the greater transparency is a result of having more outside directors, or whether companies that put greater stock in transparency are more likely to acquire more outside directors.

Wharton professors Christopher Armstrong and Wayne Guay, along with John E. Core of MIT’s Sloan School of Management, delved into that question in a paper, “Do Independent Directors Cause Improvements in Firm Transparency?” published in the Journal of Financial Economics. In this interview with Knowledge@Wharton, Armstrong and Guay discuss their findings and explain what it takes for companies to improve governance and information flow, and why there are no “one size fits all” solutions.