In Search of Director Independence

Who Decides?

The ISS estimates 26.5% of U.S. companies will have to alter the makeup of their boards to meet the NYSE's requirement for a majority of independent members, McGurn said. Also, he said 28% of audit committees, 32% of compensation committees and 74% of nominating committees will need changing to meet new requirements for total independence. Nominating committees require the most significant change, "because how can you have independence on boards when CEOs and other insiders are playing a role in selection of directors in the first place?" he wondered.

Along with firms such as Tyco (TYC Quote) that have made changes "under duress," a number of companies have recently announced board makeovers in an effort to meet new independence requirements even before they become mandated by regulators, McGurn noted. Among them are: Bank One (ONE Quote), Cendant (CD Quote), Cinergy (CIN Quote), CIT Group (CIT Quote), Citigroup (C Quote), FleetBoston Financial (FBF Quote), Heidrick & Struggle (HSII Quote), Hot Topic (HOTT Quote) and Liberate Technologies (LBRT Quote).

Additionally, McGurn speculated that many people who serve on boards are going to cut back on their commitments, because of the increased demands on directors. Just last week, Citigroup chieftain Sandy Weill resigned his directorships from the board of AT&T (T Quote) and said he would not stand for re-election for United Technologies' board, in order to avoid potential conflicts. "Weill's interlocks are something that the stock exchange and many investors don't include in their definition of nonindependence, so it's raising the bar a bit," McGurn commented.

Elsewhere, Apple (AAPL Quote) CEO Steve Jobs resigned from the board of Gap (GPS Quote) citing a need to "focus on other priorities."

Presumably, both executives' day jobs prohibit them from meeting the heightened expectations now placed on board members. (Martha Stewart's resignation from the Board of the NYSE was a bit more complicated, given the questions about her sale of ImClone stock.)

"I'm not going to pretend it's not going to be more difficult to land good directors at a time when the candidate pool is going to be sorely tested," McGurn said. "It's going to become more difficult."