June 12, 2002
New York Stock Exchange Calls for Tighter Corporate Governance Standards
by William Baue
At the SEC's request, the New York Stock Exchange drafted recommendations to fortify corporate
governance standards and restore investor confidence.
Last week, the New York Stock Exchange (NYSE)
released a report recommending stricter corporate governance standards and disclosure practices for
NYSE-listed companies. The NYSE's Corporate Accountability Listing Standards Committee drafted the
recommendations in response to a request from U.S. Securities and Exchange Commission (SEC) Chair
Harvey Pitt. Mr. Pitt made the request last February after reviewing the corporate governance
listing standards. The NYSE recommendations are intended to restore investor confidence in the
aftermath of several visible corporate meltdowns such as Enron.
investors about the integrity of the corporate governance and disclosure process alone is not
enough," said NYSE Chairman and CEO Dick Grasso. "Investors demand and deserve truly meaningful
reform and substantive change to restore their trust and confidence in our publicly traded
companies, our regulatory authorities, and our markets. The measures proposed by the NYSE
Corporate Accountability and Listing Standards Committee go a long way in addressing investor
concerns and expectations."
The NYSE is now inviting public comment on the recommendations
before they are voted on by the NYSE Board of Directors on August 1.
"The comments from
investors will most likely address three issues," said Social Investment Forum (SIF) Chair Timothy Smith. "First,
they will appreciate the leadership that the stock exchange has taken, putting its finger right on
the issues--most visibly that the majority of directors should be independent. However, the second
comment will address recommendations that don't go far enough or unclear definitions, for example,
the definition of director independence. The third comment will address where the stock exchange
is silent on issues that really require additional information, for example, there is no reference
to staggered boards."
On the day of the report's release, TIAA-CREF applauded the
recommendations. The pension fund manager for U.S. educational and research institutions
specifically praised the NYSE's call for shareowner voting on all equity-based compensation, such
as stock option plans. TIAA-CREF urged NASDAQ to adopt similar policies.
recommendations tighten its definition of an "independent director."
qualifies as 'independent' unless the board of directors affirmatively determines that 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)," the report states.
"Companies must disclose these determinations."
Compare this with the definition suggested
by the Council for Institutional Investors (CII),
an organization of large public, Taft-Hartley, and corporate pension funds.
simply, an independent director is a person whose directorship constitutes his or her only
connection to the corporation," declare CII's corporate governance policies.
NYSE and CII
each define "independent" in further detail. The case of W. Paul Fitzgerald, a director at the
data storage market leader EMC
Corporation (ticker: EMC), illustrates how the NYSE definition may not be as strict as the CII
definition. Mr. Fitzgerald is the brother-in-law of EMC founder Richard Egan and the nephew of
fellow director John Egan. In addition, Mr. Fitzgerald's brother's insurance-brokerage firm
received $1.57 million from EMC last year. However, the NYSE recommendations may uphold EMC's
contention that Mr. Fitzgerald is independent, while CII's definition clearly supports EMC
shareowners who contend that he is not.
The NYSE report includes recommendations to Congress and
the U.S. Securities and Exchange Commission (SEC). However, these recommendations remain silent on
the issue of staggered boards. Proponents of staggered terms for directors argue that the strategy
protects against hostile takeover bids. However, staggered boards also make it more difficult for
shareowners to change the composition of boards. Many corporate governance advocates thus oppose
staggered boards. The upcoming edition of the Stanford Law Review includes an article by three
Harvard University professors documenting how staggered boards erode shareowner value.
hold the board accountable, we should have annual elections of directors," said Mr. Smith.
The Social Investment Forum plans to submit comments on the recommendations.
think these are important first steps, but there are many more changes that are necessary to
restore credibility," said Mr. Smith.