3.4.9 Independent directors in a strong majority on the board and as sole members of committees, plus requirements for qualifications

Independent directors in the US play an important role in bolstering investors' confidence.1 After Enron and WorldCom the SEC prompted Congress to accept the Sarbanes-Oxley Act, which established that the audit committee should be exclusively composed of independent directors. The NYSE Rules subsequently stipulated that the majority of the board should consist of independent directors and that each committee should consist exclusively of independent directors.2

There are some qualitative requirements for the audit committee. The NYSE Rules require that each audit committee member must be or become financially literate. In addition, one member of the audit committee must be a fmancial expert.3

The concept of independence has been defined de jure. However, the independence of directors must be de facto as well. Outside directors need to be more than independent, they need to be independent-minded. They must also be courageous.4

In various court cases the concept of independence has been given a stricter interpretation. The Oracle Corp. case of 2003 is an example where a special litigation committee was "fraught with conflicts".5

The expectation required of such an extra, higher level of independence can also play a role in takeover cases, where directors may have a self-interest. The same Delaware Vice-Chancellor, Leo Strine, wrote in 2002 after Enron: "The question of whether a director can act independently is inherently situational".6

The qualitative requirements for independent directors are multiple and serious: sufficient time for the job,7 diversity and mix of knowledge and experience and in some cases specialist knowledge of the business. As regards time, directors should not have too many other board directorships. Most corporations limit the number of other board positions. Executives should usually have not more than one or two other directorships. A good many independent board members are limited to two other board membership, or three or four at most.8

Diversity is a well-developed requirement in the US. A recent study found that greater diversity of board membership is associated with higher returns to investors.9 There should be at least one woman, one academie and one person of colour. Nearly all corporations comply to the requirement of at least one woman and one person of colour.10

A board should also be able to draw on a mix of knowledge and experience from its members in the fields of accounting and finance, risk management, strategie and business planning, legal matters and compliance, human resources, marketing, e-commerce and internet,11 international trade, and industryspecific research and development and, on the boards of banks, specific knowledge of the banking industry.

In the post-Enron business environment, it has become more difficult for companies to attract qualified directors. This is partly due to the stricter independence rules, partly due to the requirement of a financial expert on the auditing committee and lastly because of increased scrutiny by enforcement agencies and institutional investors. Other factors include the greater risk of liability and the time commitment. The first to feel the consequence are CEOs who now rarely join boards of other companies. Prestige and the opportunity to gain additional knowledge and experience and add value will continue to serve as important incentives for qualified persons to wish to join the boards of corporations.12 Now we have to start questioning whether the pool of eligible independents is large enough to fulfil the demand.