Boards of directors were heavily blamed by many for not nipping the Enron, WorldCom and other corporate scandals in the bud. Depending on who was doing the criticizing, directors were at worst complicit or at best ignorant and complacent as corrupt chief executives and their greedy/intimidated minions ran amok with the companies' finances.
The Sarbanes-Oxley reform legislation that followed picked up on the clamor. The rules now insist that at least one member of the audit committee be "financially sophisticated," a term defined loosely as someone who, by virtue of professional experience, can understand financial statements and generally accepted accounting principles.
"The idea was that somehow this would make the board better able to monitor and detect potential fraud," says Wharton finance professor Geoffrey Tate. In concentrating on sharpening the monitoring role of boards of directors, however, the reformers have overlooked potential conflicts that arise from the advisory role that directors also play, says Tate, co-author of a new paper titled, "The Impact of Boards with Financial Expertise on Corporate Policies."
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