How will you recruit for audit committees?

• Author: WEISS, STEPHEN J.

New rules will make this more difficult, but an enhanced D&O policy can help.

THIS YEAR, public-company boardrooms will feel the impact of a spate of new rules intended to enhance audit committee effectiveness and the reliability of financial statements. Adopted in December 1999 by the New York and American Stock Exchanges and the National Association of Securities Dealers (the self-regulatory organizations or "SROs"), and the SEC, these rules collectively require, among other things, an audit committee to include at least three directors, each of whom must be independent and "financially literate," and one of whom must have "accounting or financial management expertise." The rules also require the audit committee to report on its activities in the company's proxy statement.

Many knowledgeable securities lawyers believe that the new rules will expose audit committee members to increased potential liability. The SEC's rules include "safe harbors" that limit the liability of audit committee members but, unfortunately, they do not protect members against all liability provisions under the federal securities laws or against liability under state law.

The new rules clearly will make it more difficult to retain and recruit audit committee members. This anticipated difficulty of staffing audit committees prompted the NASD to allow its issuers 18 months to meet the new audit committee size and membership qualification requirements. Similar phase-in periods are also provided by the other SROs and the SEC.

But even before all the rules take effect, recruiting audit committee members will require doing everything possible to provide them maximum protection. You can do this by strengthening at least the following three liability-protection measures:

* D&O insurance is the most important of these measures. First, it provides an independent, contractual source of indemnity for directors which is not subject to the financial soundness of their company. Second, insurance can cover losses of directors even when company indemnification is prohibited because it is against public policy. Coupling the importance of this insurance with the fact that all D&O policies in the marketplace today have coverage shortfalls, underscores how essential it is to upgrade your D&O insurance coverage.

Your existing D&O insurance policy should be reviewed now and, if found inadequate, renegotiated. No need to defer this until the policy is renewed or replaced. This is...