March 14, 2003

Finally, there is some movement

Finally, there is some movement from the NYSE and Nasdaq on their corporate governance listing standards…

The NYSE filed amendments to its proposed listing standards on director independence with the SEC that excerpt their independence proposals from the broader filing made last summer. This will allow the SEC to address and publish them for comment separately.

As proposed, the NYSE’s proposal to require that boards have a majority of independent directors has not been changed. However, the amendments replace the per se independence bar for employees/former employees with a rebuttable presumption. This presumption is that any director who receives more than $100k/yr. in direct compensation from the company (other than director fees or forms of deferred compensation for prior service) is presumed not to be independent for 5 years following the year in which more than $100k was received. Because the presumption is rebuttable, a director may be deemed independent if all the independent directors determine that the compensatory relationship is not material – and this determination is explained in the company’s proxy statement.

The NYSE also added a bright-line standard for determining independence when a director is affiliated with another company that has a business relationship with the company – a director would not be independent if the director is an executive officer or employee of another company and: (1) that company accounts for the greater of 2% or $1 million of the company’s gross revenues; or (2) the company accounts for the greater of 2% or $1 million of the other company’s gross annual revenues. There is a 5-year look-back period. Like the NYSE’s initial proposals, the amended independence standards require the board to make an affirmative determination that a director has no material relationship with the listed company and permit the adoption of categorical standards to assist the board in making independence assessments.

In addition, although the NYSE initially proposed allowing companies 24 months from SEC approval of final listing standards to achieve majority independence, the amendments propose shortening that transition period to 18 months (30 months for companies with staggered boards).

The NYSE expects that its remaining corporate governance proposals will be published for comment separately – but that all proposals will be given final SEC approval and made effective as a whole (with appropriate transition periods for different provisions).

Nasdaq two revised proposals relate to the independence of boards/committees and codes of conduct. The amendments withdraw the earlier proposal to require audit committees to have a “financial expert” – thus, reverting to its existing requirement that at least one member of the audit committee have financial experience). The amendments also clarify that the required codes of conduct must have all of the elements required under Section 406 of Sarbanes-Oxley the SEC’s related rules.

Regarding board/committee independence, the Nasdaq proposals now establish that where a director has a family member who receives annual compensation in excess of $60k in the current or any of the past three fiscal years, the director is not disqualified from being independent unless the family member is an executive officer – as well as require that the audit committee charter set forth the committee’s purpose, which is to oversee the company’s accounting and financial reporting processes and audits of the company’s financial statements.

For more information, see the client alerts from Gibson Dunn at – and Weil Gotshal at