June 3, 2002

CALLED TO ACCOUNT

NYSE Considers Tough New Rules
To Improve Corporate Governance

Reacting to a spate of recent corporate scandals, the New York Stock Exchange this week will consider tough new governance rules for its listed companies.

An advisory panel will urge these changes when the NYSE's board of directors meets Thursday. The Corporate Accountability and Listing Standards Committee's report, reviewed by The Wall Street Journal, includes significant new listing requirements, such as: an independent majority on a company's board; a stricter definition of director independence; regular executive sessions of nonmanagement directors; the appointment of a lead director solely to run those meetings; investor approval of all equity-based pay plans; and a ban on broker votes for such plans unless they get customers' approval. The NYSE declined to comment.

The new rules could well tilt the balance of boardroom power away from management at many companies. Stronger governance standards will give directors "better tools to empower them," the report concludes. Some corporate-governance advocates undoubtedly will view them as not going far enough -- while certain executives will consider them excess regulation.

The panel report says Big Board directors are expected "to take final action" on the governance recommendations at their Aug. 1 meeting. NYSE-listed businesses will have as long as two years to achieve majority board independence, but each company "must publicly disclose when it becomes compliant," the report says. The other requirements would take effect right after the NYSE board approves them.

Late last month, the Nasdaq Stock Market approved its own new set of governance rules after sending them in proposal form to Securities and Exchange Commission Chairman Harvey Pitt. The Big Board hasn't yet shared its proposed reforms with Mr. Pitt, but he expects to hear from NYSE officials after Thursday's board meeting, an SEC spokeswoman said. The commission must approve listing-standard changes by both stock markets. The beefed-up governance regulation, sought by the SEC following the meltdown of Enron Corp. and several other big companies, could mark an important shift for the two big stock markets. Nasdaq and the NYSE have been criticized for not responding more quickly to tighten governance rules for listed firms.

About 75% of NYSE-listed companies already have a majority of independent directors as defined by the Big Board panel's report, concludes an analysis of 2001 proxy statements for 1,100 such concerns by the Investor Responsibility Research Center in Washington. The report defines an independent director as someone the board decides "has no material relationship" to the listed company and hasn't been employed there for at least five years, among other things. Under current NYSE rules, a director is considered "independent" if, among other things, three years have elapsed since termination of employment with the company.

On the other hand, only a small minority of Big Board-traded concerns require nonmanagement directors to meet regularly without management, governance specialists say. Though the NYSE panel doesn't mandate the frequency of such sessions, its report suggests regular sessions will "empower nonmanagement directors to serve as a more effective check on management."

To minimize controversy, the committee's report avoids using the term "lead" outside director in proposing the appointment and annual disclosure of someone to run these executive sessions. But the Big Board panel did embrace the concept of a lead director, according to an informed individual.

Computer Associates International Inc. and E*Trade Group Inc. recently appointed lead directors, imitating a practice already in fairly wide use. NYSE Chairman Richard Grasso serves on the Computer Associates board. Most lead directors also help to organize board-meeting agendas; act as a liaison between outside board members and management; and run the board if the chairman becomes incapacitated.

Simply requiring that a lead director conduct executive sessions doesn't go far enough, said Peter Gleason, research director of the National Association of Corporate Directors in Washington. "That position could be expanded."

But the proposals could create a more adversarial relationship between a chief executive and the rest of a board, said Dennis Carey, a vice chairman of recruiting firm Spencer Stuart and co-founder of the Directors' Institute at the University of Pennsylvania's Wharton School. "We're attempting to kill a mouse with an AK-47," he added.

The Business Roundtable, a Washington group representing chief executives of major corporations, wrote Mr. Grasso last Friday objecting to the panel's expected endorsement of widespread shareholder approval of stock-option and restricted-stock plans. NYSE-listed companies currently aren't required to seek investor approval for broad-based plans.

-- Kate Kelly contributed to this article.