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The following report is copied with permission from Corporate Governance Highlights, a private weekly newsletter for clients of Investor Responsibility Research Center ("IRRC"), the leading source of impartial, non-advocacy research for institutional investor interests in corporate governance and proxy voting issues.


Corporate Governance Highlights

Vol. 15, No. 35

September 3, 2004


NYSE’s Proposed Rule Changes Would Require Boards

to Explain How They Determined Directors’ Independence

IN ADDITION, NON-MANAGEMENT DIRECTOR WOULD HAVE TO PRESIDE OVER EXECUTIVE SESSIONS. The New York Stock Exchange is seeking comments on proposed changes to Section 303A of the NYSE Listed Company Manual Relating to Corporate Governance that would require boards to explain in their proxy statements how they have determined if their directors are independent. The changes also would offer boards more specific guidelines on who qualifies as independent.


   The original rule, which was approved by the SEC in November 2003, requires that NYSE-listed companies have a majority of independent directors on their boards, and that their audit and compensation committees be comprised entirely of independent directors. To help boards reach a determination about independence, the rules specify that any board member who receives $100,000 or more each year in compensation that is not related to directors’ fees, pension or deferred compensation is not considered independent by the exchange. The NYSE rule also recommends, “it is best that board making independence determinations broadly consider all relevant facts and circumstances.” Most U.S. companies have until October 31 to comply with these initial rules.


   The NYSE says it decided to propose changes to this section of the manual for clarification and “to align it more closely with the similar standard in place at other listing markets.” The proposed changes would require companies to identify which directors are independent and disclose the basis for these determinations. In addition, a director would not be considered independent if he or she meets any of the following criteria.

  • Is affiliated with or employed by a firm that is the company’s internal or external auditor.
  • Has an immediate family member (spouse, parents, children, siblings, mothers and fathers-in-law, sons and daughters in-law, brothers and sisters in-law and anyone who shares a director’s home) who is a current employee of such a firm and who participates in the firm’s audit, assurance or tax compliance (but not tax planning) practice.
  • Was or has an immediate family member who was within the past three years (but is no longer) a partner or employee of such a firm and personally worked on the listed company’s audit within that time.
  • Was or has an immediate family member who was within the past three years employed as an executive officer of another company where any of the listed company’s present executive officers at the same time served on that company’s compensation committee.
  • Was or has an immediate family member who was within the past three years an executive officer of a company that makes or has made payments to, or received payments from, the listed company for property or services in an amount which, in any of the past three fiscal years exceeds the greater of $1 million or 2 percent of the company’s consolidated gross revenues. (Contributions to tax-exempt organizations shall not be considered payments.)

   The exchange is proposing another interesting change that affects the conduct of the executive sessions that are required in the original rules. The rules that were put in place last year state that non-management directors of each listed company must meet at regularly scheduled executive sessions without management. Now, the proposed rules would require that a non-management director preside over each of these sessions, although the same director is not required to preside over each one. If one director is chosen to preside at all sessions, his or her name must be disclosed in the company’s proxy statement. If the same individual is not the presiding director at every meeting, the company must disclose the procedure by which a presiding director is selected for each session. 





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            Editor: Rosemary Lally


Contributors: Brian Belensky, Jamie Carroll and Marty Personick




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