June 2, 2002 The Big Board Is Standing Up for Independence
Winning back trust will take far longer than the time it took to lose it, of course. But a step in the right direction is expected this week, when the New York Stock Exchange announces its prescriptions for how the companies whose shares it trades can improve their corporate governance. Since February, the Corporate Accountability and Listing Standards Committee of the exchange has been reviewing requirements that it makes of its listed companies to increase accountability and integrity in their boardrooms. The committee's report on this effort and its proposals will be released Thursday. The New York Times obtained a copy of the report last week from a person involved in its development. The proposals are significant and will create discomfort in some otherwise comfortable corporate boardrooms. The exchange will submit the proposals for public comment for two months. New rules go into effect in August. The biggest change is the Big Board's proposal to require that independent directors are a majority of a company's board. At the moment, Big Board rules require just three independent directors per board, regardless of its size. As their boards are now configured, one-quarter of the exchange's listed companies do not meet the proposed standard, according to Carol Bowie, director of Governance Research Services at the Investor Responsibility Research Center in Washington. Ms. Bowie identified Family Dollar Stores, the Chemed Corporation and the EMC Corporation as companies where less than half of the directors are independent. To meet the Big Board's standard, these and many other companies will have to reconfigure their boards and introduce new independent directors. The exchange also wants to tighten its definition of "independent." For a director to be considered independent, the report states, the board must determine and affirm in its regulatory filings that the director has no material relationship with the company. Details on the relationships and why the company does not consider them to be material will also be required. Any director who has worked for the company in the previous five years will not be considered independent, and no director now or formerly affiliated with an auditor of the company can be independent until five years after that affiliation has ended. Current cooling-off periods at the Big Board are three years. Another significant proposal would require nonmanagement directors at each company to meet regularly without management present. This is intended to promote open discussion among outside directors. Shareholders would also gain more control over stock option plans. All stock option plans will have to be put to shareholder votes. Now, companies are required to put to a shareholder vote only those plans offered to officers or directors; broad-based plans are exempt. The new rules would forbid brokerage firms who hold shares for their customers from voting those shares on any stock option plan unless the broker has instructions from the customer to do so. Currently, a firm is free to vote the shares as long as it has not received instructions from the owner. The proposals also say that directors' fees must be the sole compensation that an audit committee member receives from the company and that a member of the committee associated with a major shareholder that owns 20 percent or more of the company's shares may not vote on audit committee matters. Ms. Bowie said the proposals in the Big Board report "will insure a substantial level of independent thinking on the boards." Not a moment too soon. Daniel Webster said: "Confidence is a thing not to be produced by
compulsion." It must be earned, hour by hour. At last, that process is
beginning.
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he
term "business ethics" does not have to be an oxymoron. But in today's
scandal-a-minute atmosphere, it has surely become one. Public trust in
corporate America has been undeniably shattered. What is less clear is exactly
how and when confidence in the markets, regulators, and business in general
will be restored.