"American investors have had their faith in corporate America badly shaken in recent months," said NYSE Chairman and CEO Dick Grasso. "Their confidence and participation are essential to the strength of our markets and economy. Our board had 85 million good reasons - each and every individual investor in the United States - as the basis to take strong action today."
The NYSE board adopted the final recommendations of its Corporate Accountability and Listing Standards (CALS) committee following a two-month comment period in which more than 300 comment letters were received. The Exchange will promptly submit a rule filing to the Securities and Exchange Commission for review.
Mr. Grasso again thanked board members Gerald M. Levin, H. Carl McCall and Leon E. Panetta for co-chairing the committee. "The work of the committee, led by Jerry, Carl and Leon, is an extremely important contribution to restoring investor confidence. The stakes are high - economic growth, jobs and improving the standards of living globally all ultimately lie in the balance."
Putting Investors First
"This marks the culmination of an intensive six months in which we have sought to translate broad and extensive public input into specific measures that address investor concerns," said Mr. Levin, CEO (retired) of AOL TimeWarner Inc. "It is vital to immediately communicate to the public through our actions that we're absolutely committed to rooting out bad practices and bad people, and putting in place a system of governance that clearly puts investor interests first."
"These new standards will have a lasting impact on the culture of corporate America, and will help restore investor confidence," said Mr. McCall, Comptroller of the State of New York and Sole Trustee, Common Retirement Fund of the State of New York. "The reforms we are adopting today are a tremendous step forward towards greater accountability and improved corporate governance."
"Broad public participation and integrity remain at the core of our corporate system, driving our economic growth," said Leon E. Panetta, director of the Panetta Institute for Public Policy. "With our actions today, the NYSE aims to reassure investors that those running our nation's companies share those core values."
Comments Underscored Need for Effective, Sensible Solutions
Following the June 6 release of the initial CALS report, the CALS recommendations garnered strong support from President Bush, SEC Chairman Harvey Pitt, members of Congress, CEOs of listed companies, institutional investors, state pension funds, organizations such as the Business Roundtable and the Council of Institutional Investors, representatives of the financial-services industry, individual investors, and other Exchange constituents. In addition to many meetings, telephone calls and e-mails, the NYSE received more than 300 comment letters, and will release a synopsis of the comments. Some of these comments, as well as legislative developments and further deliberations of the CALS, resulted in several clarifications and modifications of the original recommendations. (A list is attached.)
"The size and breadth of the public response served to strengthen our resolve to recast our corporate-governance requirements with meaningful and substantial change," said Mr. Grasso. "We thank all who provided input throughout the process; taken together, their voices underscored the need for effective, sensible solutions that will build on the strengths of our model of corporate democracy and disclosure, and not detract from it. We expect the SEC will move quickly on our recommendations, and that we will have in place this fall a more effective set of checks and balances."
|
Final
Recommendation |
Current
Rule(s) |
|
Independent
directors must comprise a majority of a board. Companies must have a
nominating committee, compensation committee (or committees of the
company's own denomination with the same responsibilities) and an audit
committee, each comprised solely of independent directors. Controlled
companies are exempt but must have a minimum three-person audit committee
composed entirely of independent directors. |
Listed
companies must have a minimum three-person audit committee composed solely
of independent directors. No requirement for establishment or composition
of nominating or compensation committees. |
|
Non-management
directors must meet without management in regular executive sessions. |
No
such requirement. |
|
For
a director to be deemed "independent," the board must
affirmatively determine the director has no material relationship with the
listed company (either directly or as a partner, shareholder or officer of
an organization that has a relationship with the company). |
Existing
definition precludes any relationship with the company that may interfere
with the exercise of director's independence from management and the
company. |
|
Independence
also requires a five-year "cooling-off" period for former
employees of the listed company, or of its independent auditor; for former
employees of any company whose compensation committee includes an officer
of the listed company; and for immediate family members of the above. |
Cooling-off
period is three years and references only former employees of the company.
Board of directors can make an exception for one former officer, provided
the reason is explained in the next proxy statement. |
|
Every
listed company must have an internal audit function. |
No
current requirement. |
|
Director's
compensation must be the sole remuneration from the listed company for
audit-committee members. |
No
current requirement. |
|
Listed
companies must adopt a code of business conduct and ethics, and must
promptly disclose any waivers of the code for directors or executive
officers. |
No
current requirements. |
|
Shareholders
must be given the opportunity to vote on all stock-option plans, except
employment-inducement options, option plans acquired through mergers and
tax-qualified plans such as ESOPs and 401(k)s. Brokers may vote customer
shares on proposals for such plans only pursuant to customer instructions. |
Shareholder
approval required of stock-option plans in which officers or directors may
participate, but broad-based plans and one-time employment inducements are
exempt. Brokers can vote customer shares without instructions as long as
the proposal is not contested and the proposal does not cover more than 5
percent of outstanding stock. |
|
Listed
companies must publish codes of business conduct and ethics, and key
committee charters. Waivers for directors or executive officers must be
promptly disclosed. |
No
current requirements. |
|
Listed
foreign private issuers must disclose any significant ways in which their
corporate-governance practices differ from NYSE rules. |
No
current requirements. |
|
Each
listed-company's CEO must certify annually that he or she is not aware of
any violation by the company of NYSE corporate-governance standards. |
No
current requirements. |
|
The
NYSE may issue a public reprimand letter for violation of a
corporate-governance standard, in addition to the existing penalty of
delisting. |
No
current provision for a public reprimand. |
|
The
NYSE urges every listed company to establish an orientation program for
new board members. |
No
such recommendation has been made previously. |
|
In
conjunction with leading authorities in corporate governance, the NYSE
will develop a Directors Institute. |
NYSE
has generally supported educational initiatives, but this will be the
first formalized program designed for directors. |
- A "controlled" company in which more than 50 percent of the voting power is held by an individual, group or another company, rather than the public, need not have a majority of independent directors on its board nor have nominating and compensation committees composed of independent directors. However, such companies must have a minimum three-person audit committee composed entirely of independent directors. (Recommendation 1)
- A board may adopt and disclose categorical standards to assist it in determining director independence, and may make a general disclosure if a director meets these standards. Any independence determination for a director who does not meet the standards must be specifically explained. (Rec. 2)
- A company may disclose the procedure by which the presiding director is selected for each executive session of the non-management directors, along with a means for shareholders and employees to communicate with the non-management directors. (Rec. 3)
- Companies may allocate the responsibilities of the nominating and compensation committees to committees of their own denomination, provided that the committees are composed entirely of independent directors. (Rec. 4)
- Disallowed compensation for an audit-committee member includes fees paid directly or indirectly for services as a consultant or a legal or financial advisor, regardless of the amount. No restriction on the form of compensation as a director or committee member was intended. (Rec. 4)
- In light of the provision in the Sarbanes-Oxley Act that the audit committee be "directly responsible for the appointment, compensation and oversight of the work of the independent auditor," the NYSE will not make a duplicative proposal. (Rec. 5)
- Each company must have an internal audit function (clarifying that this was intended as a requirement). (Rec. 7)
- Employment-inducement options, option plans acquired through mergers and tax-qualified plans such as ESOPs and 401(k)s need not be approved by shareholder vote. These plans are generally recognized as not involving the same policy issues as other stock-option plans. (Rec. 8)
- The NYSE should establish a working group to advise on possible mechanisms to facilitate the proposal that brokers may not vote on equity-compensation plans presented to shareholders without instructions from the shareowner. This will not delay the effectiveness of the broker-may-not-vote proposal. (Rec. 8)
- The disclosure of significant differences between a foreign private issuer's corporate governance and the NYSE requirements for domestic companies was not intended to be a "laundry list" and may be made in a brief, general summary of material differences. (Rec. 11)
- The NYSE should defer to the recent SEC order and the Sarbanes-Oxley Act regarding the CEO certifications on the quality of disclosure. The CEO certification on NYSE rule compliance is retained. The SEC and NYSE certifications must be disclosed in each company's annual report to shareholders. (Rec. 12)
