WASHINGTON — The Securities and Exchange Commission this week will take its latest steps in a campaign that the agency hopes will pressure boards of directors to serve as watchdogs for investors -- not lapdogs of management.
On Wednesday, the SEC is scheduled to propose rules to increase the independence of mutual fund directors.
The rules would raise a board's mandated share of independent or "outside" directors -- people clearly free from conflicts of interest -- to a three-fourths majority from a simple majority.
What's more, the chairman would have to be independent and independent directors would hire their own staffs.
The SEC in November endorsed rules developed by the New York Stock Exchange and the Nasdaq Stock Market that require companies listed on those exchanges to maintain boards that have a majority of independent members.
"For me, the improvement that can come by board vigilance is of immense importance," SEC Commissioner Harvey J. Goldschmid said at a recent commission meeting. That view is widely shared on the five-member SEC.
While critics say the agency should be moving more forcefully, its push may be starting to have an effect on jobs that traditionally have paid well without being especially demanding.
"Boards are a lot more accountable than they were before," said Roger W. Raber, president of the National Assn. of Corporate Directors.
"They're a lot more independent. There's a lot more focus on getting the right directors on the board," he said.
In anti-fraud actions, the SEC has begun to target board members for not stopping misconduct by corporate executives. And the agency is demanding changes in corporate governance procedures as a condition of settlements with companies accused of fraud.
The SEC's moves are among tremors rolling through the once placid world of corporate directors, the people charged with overseeing a company or mutual fund's overall direction, hiring auditors and setting executives' pay, and providing a supposedly independent bulwark against fraud and corruption.
The traditionally light-but-prestigious duty has taken on added gravity in the wake of the scandals at WorldCom Inc. and Enron Corp. and, more recently, revelations about abusive practices at mutual funds.
The federal Sarbanes-Oxley corporate reform law and the new rules at the SEC and major stock exchanges have assigned specific responsibilities to directors that in the past were often appropriated by ambitious chief executives, including auditing, picking a compensation consultant and controlling the nomination process for other board members.
Even now, though, few would describe service on the board of a corporation or mutual fund as a hardship. Overall annual compensation averages around $102,000, including cash and stock benefits, according to a December 2003 survey by the Investor Responsibility Research Center in Washington. Every year, the survey found, directors attend an average of seven meetings -- which may entail a few days of work apiece -- and participate in periodic conference calls.
But by some accounts, the effort to toughen the standards for directors has infused a growing number of directors with a new assertiveness. Chuck Haggerty, the retired chief executive and chairman of Western Digital Corp. and a member of three corporate boards, said directors were increasingly inclined to regulate themselves in a way that they often didn't prior to the scandals.
He recalled the case of a board member who had displayed a penchant for skipping meetings and leaving early when he did show up. "He was told or counseled about it a couple of times," Haggerty said, "and then the governance committee told him, 'It's time for you to resign,' " and he did.
Not all chief executives are comfortable with more assertive boards, Haggerty said.
"There are some CEOs who continue to fight the change," he said. "They think they ought to control who the board members should be, or they should go about choosing the compensation consultant. That's not the way it works anymore."
At the SEC, enforcement officials have required greater board independence as a condition of settlement in cases growing out of the recent scandal in the mutual fund industry. In one noteworthy example, the SEC is requiring Putnam Investments to install an independent chairman and a board with a majority of independent directors as part of a partial settlement of fraud charges.
The changes were partly aimed at guaranteeing investors "uncompromised representation" in the boardroom, said Stephen M. Cutler, the SEC's enforcement chief.
SEC Chairman William H. Donaldson last week underscored the importance of independent directors, saying outside directors, in particular, "should serve as independent watchdogs guarding the interests of investors."
In a case involving the Milwaukee-based fund complex Heartland Advisors Inc., the SEC in December delivered a public scolding to five directors for failing to exercise their oversight duties.