According to public filings, about 96% of the boards of Standard & Poor’s 500 (S&P 500) companies had a lead or presiding director in 2008. That was not always the case; in fact, that percentage represents a four-fold increase since 2003. The greater prevalence of lead directors is a byproduct of the passage of landmark U.S. corporate governance reform legislation — the Sarbanes-Oxley Act — in 2002. The passage of Sarbanes-Oxley, and the subsequent increase in the number of lead directors, arose from a growing public distrust of management and board “insiders” in the wake of a series of multibillion-dollar financial debacles such as Enron Corp. and WorldCom Inc.
One mandate of Sarbanes-Oxley — which was subsequently clarified by regulations issued by the U.S. Securities and Exchange Commission (SEC) and the New York Stock Exchange (NYSE) — is a requirement that independent directors on the board of a U.S. public company meet not only as part of the full board but also separately and apart from management and non-independent directors. The lead or presiding director role was institutionalized by the need to have a director chair such meetings of the independent directors. (The terms presiding director and lead director have come to be used interchangeably; as a practical matter, the use of the term lead director predominates.)
The new governance rules also required that, generally, independent directors not only constitute a majority of directors on every public company board, but that they have a much greater role in the work of the board committees. For example, companies listed on the NYSE were now required to have audit, compensation and nominating/corporate governance committees that consist only of independent directors. This represented a substantial change. The traditional source of influence on directors had been the CEO and the chairman of the board; historically, their roles had included identifying issues that should be addressed by the board, appointing board committee members and creating the agenda for board meetings.
To understand the emerging role of the lead director in U.S. public companies, my research assistants and I examined SEC filings for S&P 500 companies, which represent a broad cross section of the largest U.S. enterprises.