Trustees and staff of the California Public Employees’ Retirement System are developing guidelines to grade companies in Calpers’ portfolio according to the independence of their boards. Calpers cannot be ignored: its $80 billion in equities makes it one of the nation’s largest shareholders and a force to be reckoned with in the governance arena. A study conducted with Diane Del Guercio at the University of Oregon shows that Calpers has the power to provoke significant changes, such as takeover attempts, shifts in turnover, restructurings, and asset sales.

CEOs would be wise to embrace the idea of strongly independent boards. For if investors can’t get boards to work well, they may resort to other measures: sitting on boards themselves, lobbying for direct government regulation, or supporting a return of corporate raiders.

The battle for governance

The growing power and independence of boards in the United States represents a reversal of a trend that dates back to the early years of this century. A seminal event occurred in 1914, when representatives of J. P. Morgan resigned from 30 company boards in a single day. They and other institutional investors had held sway in boardrooms for more than two decades, leaving CEOs...