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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.

"Reassuring 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.

NYSE's recommendations tighten its definition of an "independent director."

"No 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.

"Stated most 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.

Governance and Public Policy ArticlesThe 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.

"To 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.

"We think these are important first steps, but there are many more changes that are necessary to restore credibility," said Mr. Smith.


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