Are Independent Directors a Benefit or Burden?

Last Updated Oct 3, 2007 1:09 AM EDT

SEC insignia image courtesy Securities and Exchange Commission [public domain]Since Sarbanes-Oxley a slew of new requirements and oversight found its way into the law books, one of which is the "outside director" requirement. Enron taught us that we needed a little more oversight in our boards -- and one solution was to require more independent board members. Are companies benefiting from it? For small firms, the answer is likely "no." In fact, a study coming from the University of Georgia finds that outside board director pay has increased 161% in the interim between pre-SOX and post-SOX.

The Georgia study combined a broad sample of 8,000 firms of all sizes, and concluded that SOX "dramatically increased the cost of corporate boards, particularly for small firms." Other criticism says that indpendent directors often have a lack of intimate knowledge of a company; and yet another study of 254 companies in 50 industries finds that there is no evidence independent boards produce better returns for shareholders.

What's the solution? Some suggest a board comprised of important shareholders, or "oversight owners" (broadly defined as those who hold more than 1% of firm's stock for more than six months).

SEC insignia image courtesy Securities and Exchange Commission [public domain]