November 21, 2002
Companies Face Corporate Governance Hurdles
by William Baue
Most public companies will need to restructure their corporate governance policies and practices to
comply with new listing standards at NYSE and NASDAQ.
In compliance with the Sarbanes-Oxley Act, the New
York Stock Exchange (NYSE) and NASDAQ have
submitted to the U.S. Securities and Exchange
Commission (SEC) proposals for more stringent corporate governance rules for listed companies.
Most companies will have to change their corporate governance policies and practices to some
degree. The Investor Responsibility Research
Center (IRRC) recently released a report that surveyed the current status of corporate
governance structures in regards to the proposed rule changes.
entitled Board Practices/Board Pay 2002: the Structure and Compensation of Boards of Directors
at S&P 1,500 Companies, examined 1,245 U.S. companies and 11,833 directors. Authors Stacey
Burke and Glenn Davis found increasing implementation of "good" governance practices over the past
year. However, the report also revealed the persistence of "some disturbing features," such as a
shortage of independent directors on nominating committees, a lack of diversity on boards, and
extraordinary compensation to audit committee members. In short, most companies will have to roll
up their sleeves for some hard work to transform their corporate governance structures to comply
with the new listing standards.
"IRRC believes that 66 percent of NYSE companies will have
to make some changes to meet new requirements related to independence," Mr. Davis told
SocialFunds.com. "Many of these companies will need to create nominating committees to ensure
compliance with the NYSE. One in four companies in IRRC's study did not have a committee in place
which handled the nominating process."
The report also found that 29 percent of the audit
committees, 25 percent of the compensation committees and 48 percent of the nominating committees
at NYSE companies are not completely independent.
Looking at individual companies, National City
(ticker: NCC) had the highest level of board independence in the study at 93.3 percent. At the
other end of the spectrum, companies with the lowest levels of board independence included Dreyer's
Ice Cream and Papa John's International, which both have 12.5 percent independence on their boards,
and Bed Bath &
Beyond (BBBY), with 14.3 percent.
"Companies that already had good corporate
governance policies and/or programs include Pfizer (PFE) and Coca-Cola (KO)," said Beth Young,
director of special projects for the Corporate Library. "Companies that have indicated
they will expense stock options are on a good track. Specific companies that are implementing
positive changes, though in some cases they have a ways to go, are AIG (AIG) and GE (GE). AIG had a really
insider-dominated board, but recently crossed over to a majority-independent board--though they
still don't have a nominating committee."
Earlier this month, General Electric (GE)
announced a slew of changes to strengthen its
corporate governance. For example, GE is adding three independent directors, and two directors
with financial connections to the company will resign. GE's goal is to create a board with
two-thirds non-employee, independent directors, a percentage favored by many institutional
shareholders, according to the IRRC report. Only 48 percent of corporate boards have reached this
threshold yet. Also, GE will be expensing stock options.
Whether or not GE's corporate governance reforms are
exemplary, they will likely serve as a blueprint, as most companies are waiting for the SEC's final
decision on listing standards before implementing changes to the corporate governance structure.
However, this does not mean to say that companies are standing by idly waiting for the SEC's
pronouncement, as they recognize that corporate governance regulation is only one component of a
much broader issue.
"Corporate governance is moving from being seen as a compliance
issue--something for shareholders' compliance departments to deal with once a year when voting
proxies--to being an issue of investment risk," Ms. Young told SocialFunds.com. "Accordingly,
portfolio managers, fund managers and analysts are beginning to think through how to take
governance into account when deciding where to put their money. This gives responsible companies
an opportunity to lower their cost of capital by communicating to the investment community the ways
in which the governance policies and practices reduce investors' risk. The flip side is that
companies that are not responsible may have more trouble obtaining debt and equity financing, as
investors worry that sub-optimal governance arrangements are correlated with an increased risk of
financial statement fraud, self-dealing and poor decision-making."