Spurred by investor outcry and more stringent stock exchange listing rules, companies made dramatic increases in board independence levels in 2003, according to the latest edition of IRRC’s annual board practices/board pay study. At the same time, outside directors’ total pay packages declined, due to lower option grant values.
IRRC’s analysis of nearly 1,500 companies in the S&P 500, MidCap, and SmallCap indexes shows that 83 percent of the firms now have a majority of independent directors on the board, up from 78 percent last year and 72 percent five years ago.
What’s more, the average board is now 69 percent independent, compared with 66 percent last year, and 62 percent five years ago. The increase appears to result from a conscious change in the composition of boards: 13 percent of this year’s directors joined a board for the first time during the last two years, and 80 percent of those new directors are independent from the company where they now serve.
“Increased scrutiny and criticism of stock options for directors has clearly had an impact,” says Alesandra Monaco, deputy director of IRRC’s governance research service, who led the study. “Companies are using other types of stock-based compensation more, to keep the interests of shareholders and directors aligned.”
The study also found that 30 percent of companies now separate their chair and CEO positions—up from 26 percent in 2001, the biggest three-year jump ever seen. Also up—the proportion assigning the job to an independent director (9 percent this year, versus 7 percent just last year).