June 13, 2019

Director Independence: Nasdaq Proposes Changes to “Family Member” Def’n

Since 2002, the Nasdaq & NYSE definitions of “Family Member” have differed – and that’s caused more than a few headaches for anyone who has to prepare or complete a D&O questionnaire or analyze director independence. According to this notice published yesterday by the SEC, the discrepancies are all due to an oversight when Nasdaq paraphrased its definition 17 years ago – and now the exchange is proposing changes to Rule 5605(a)(2) that would essentially revert back to the old formulation.

If the revisions are approved, the Nasdaq definition will no longer include step-children – and there will also be a carve-out for domestic employees who share a director’s home. Of course, the board still has to make an affirmative determination that no relationship exists that would interfere with a director’s ability to exercise independent judgment, and those relationships can be considered as relevant factors. Comments are due in mid July.

On Monday, the SEC also published this notice of an immediately-effective Nasdaq rule change that adds a definition of “Derivative Securities” to the Rule 5615 corporate governance & IM-5620 annual meeting exemptions – and modifies & adds exemptions for issuers of only non-voting preferred securities & debt securities. Nasdaq noted that the proposed changes would substantially conform to the existing rules of NYSE Arca.

Board Leadership Structure: Governance Impact

Investors remain mixed in their view of whether companies should have an independent chair. In this “CLS Blue Sky Blog”, ISS Analytics examines the gap between board leadership practices in the US and the rest of the world – and the possible consequences. Here’s an excerpt:

In relation to board composition, board refreshment and gender diversity improve as independent leadership on the board increases. In addition, shareholder rights and responsiveness to shareholders also improve with increased board leadership.

On the compensation front, companies that lack board leadership tend to pay their CEO at a higher multiple compared to the CEOs of peer companies. However, pay equity within the C-Suite mainly correlates with whether the roles of Chair and CEO are combined. Combined CEO-Chairs tend to get paid more relative to the rest of their executive team regardless of whether there is a Lead Director on the board.

One of the next logical questions is, “Do these consequences ultimately impact company performance?” As you might expect from an academic paper entitled “Irrelevance of Governance Structure,” a couple of researchers say that “shareholder rights” might not matter.

Based on comparing “real world” outcomes to a constructed model of an efficient universe, they conclude that “the relationship between the allocation of control rights and firm performance is more complex than just holding conflicted managers accountable.” In the model, the governance structure was irrelevant when other factors were at play – e.g. shareholders having imperfect information or market power, and managers having meaningful career concerns.

Boards Around The World

Spencer Stuart has taken data from its well known “Board Indexes” (here’s the US version) and created this interactive tool to compare “average” board practices around the world. Topics include board composition, diversity, director pay and board assessments.

Liz Dunshee