-1- BOARD INDEPENDENCE AND LONG-TERM FIRM PERFORMANCE

(earlier drafts were titled: Do Independent Directors Matter?) The boards of directors of American public companies are dominated by independent directors. Moreover, many commentators and institutional investors believe that independent directors should be even more numerically dominant on public company boards than they are today. We conduct the first large sample, long-horizon study of whether board independence (proxied by proportion of independent directors minus proportion of inside directors) correlates with the long-term performance of large American firms. We find evidence that firms suffering from low profitability respond by increasing the independence of their board of directors, but no evidence that this strategy works that firms with more independent boards achieve improved profitability. Our results do not support the conventional wisdom that greater board independence improves firm performance