Beyond Beholden

Corporate law has long been concerned with director independence. In controlled companies, the conventional wisdom focuses on “beholdenness” as the main threat to independence. The prevailing theory argues that directors might feel pressured to reciprocate a past kindness from the controlling shareholder or fear retaliation. This Article argues that this conventional narrative is troublingly incomplete. I show that directors are also influenced by the prospect of rewards, or patronage, from the controller.This Article is the first to identify controlling shareholder patronage as a systemic phenomenon and to explore how anticipation of future patronage can affect director behavior. It presents an original empirical study on professional relationships between directors who are nominally independent and the controlling shareholders of their firms. My findings reveal that these relationships are far more pervasive than is usually recognized. In fact, some controlling shareholders regularly re-appoint cooperative “independent” directors to senior positions and directorships at other firms under their control. From a director's perspective, this pattern of behavior means that the potential upside of getting along with the controlling shareholder is significant. I further demonstrate that the likelihood of patronage from the controlling shareholder depends on two factors: the controlling shareholder's base of controlled entities and the concentration of its decision-making authority. Together, these factors provide an analytic framework for assessing which controllers have greater potential to create conflicts of interest. Disaggregating controlling shareholders in this way opens up opportunities and new challenges for how we define independence, analyze decisions made by putatively independent directors, and judge the utility of independent directors as a safeguard against controller opportunism