Monday, July 05, 2004

Independent directors decrease F. risk

A recent study provides ammunition for current demands for more independence on the part of C. boards, showing a correlation between a higher proportion of independent, outside directors and a lower likelihood of CF.
The study compared 133 companies that were accused of F. between 1978 and 2001, and 133 companies of similar size and from the same industries that were not, searching for significant differences in director independence, board size and other variables. The result showed that the boards of the companies that were accused of F. had fewer non-executive directors and fewer independent directors, and lower levels of independence on their audit, compensation and nominating committees.
The researchers found that, compared to the non-F. companies, companies accused of committing F.:
- had a lower percentage of outside (non-executive) directors
- had a lower percentage of independent directors (directors with no business or personal ties to the company).
- were less likely to have an audit committee of the board
- were more likely to have a compensation committee of the board
- had a lower level of independence on its audit, compensation and nominating committees (measured by the percentage of directors on these committees with no business or personal ties to the company).
The study was published in the June issue of Financial Analysts Journal, a research publication for investment practitioners worldwide published by CFA Institute.