Haynes and Boone's Newsroom

NYSE Recommends New Rules to Enhance Corporate Governance and Disclosure
06/11/2002
Arthur S. Berner

To Our Public Company Clients:

On June 6, 2002, the Corporate Accountability and Listing Standards Committee (the “Committee”) of the New York Stock Exchange released a report (the “Report”) recommending reform of its listing standards.

In the Report, the Committee expressed concern over recent failures by companies to exercise diligence, ethics and controls and welcomed the opportunity to raise corporate governance and disclosure standards.  They also expressed a desire to restore investor trust and confidence by enhancing the accountability, integrity and transparency of NYSE-listed companies.  In making their recommendations, the Committee sought to strengthen the checks and balances already in place in corporate governance practices and empower diligent directors with tools to perform their functions effectively.

The Committee’s recommendations raise the standard for corporate governance practices by increasing director independence and giving shareholders more opportunities to monitor and participate in the governance of their companies.  Violators could face punishments ranging from a letter of reprimand to de-listing with the NYSE.  Similar recommendations for the reform of corporate governance policies and procedures were approved by the board of directors of The Nasdaq Stock Market, Inc. on May 22, 2002.

We believe that our public company clients should carefully consider how the Committee’s recommendations regarding corporate governance and disclosure may affect their own practices.  Haynes and Boone expects that many audit committees, and perhaps other standing committees, will retain their own counsel and advisors to carry out the duties being required of them.  Haynes and Boone has already been engaged by such committees to help in satisfying their new functions.

PROPOSED COMMITTEE RULES REGARDING CORPORATE GOVERNANCE AND DISCLOSURE

Increasing the Role and Authority Of Directors.

• The majority of a company’s board of directors must be “independent.”  Companies will have a two-year transition period to comply with this requirement and must publicly disclose when they become compliant.
  
  
• A company’s board of directors must convene regular “executive sessions” in which the non-management directors meet without management.  In addition, the independent directors must designate and publicly disclose the name of the director who will preside at these executive sessions.
  
  
• Each company must have an audit committee, a nominating committee and a compensation committee, with each committee comprised solely of independent directors.
  
  
• The chairperson of the audit committee must have accounting or related financial management experience.
  
  
• A company must increase the authority and independence of its audit committee, including granting it the sole responsibility for hiring and firing its independent auditors as well as for approving any significant non-audit relationship with the independent auditors.

Tightening the Definition of “Independent” Director and Adding New Audit Committee Qualification Requirements.

• For a director to be deemed “independent,” the board of directors must affirmatively determine that the director has no material relationship with the company.  Such determination must be publicly disclosed.
  
  
• For a former employee or independent auditor of a company to be considered for a director’s position, there must be a five-year “cooling off” period.  The same cooling off period also applies to former employees of a company whose compensation committee includes an officer of the listed company and immediate family members of former employees and independent auditors.
  
  
• Director’s fees must be the sole compensation that an audit committee member receives from the company. In addition, an audit committee member associated with a major shareholder, that is, one owning 20% or more of the company’s equity, may not vote in audit committee proceedings. 

Fostering a Focus on Good Corporate Governance.

• A company must adopt and disclose its corporate governance guidelines.
  
  
• A company must adopt and disclose written charters for its audit, compensation and nominating committees.  Each charter should address the committee’s purpose, goals and responsibilities and an annual performance evaluation for the committee.

Giving Shareholders More Opportunity to Monitor and Participate in the Governance of Their Companies.

• Shareholders must be given the opportunity to vote on all equity-based compensation plans.  Brokers may only vote their customers’ shares on proposals for compensation plans in accordance with their customers’ instructions.
  
  
• A company must adopt and publish codes of business conduct and ethics for directors, officers and employees.  Waivers of such codes for directors and executive officers must be disclosed promptly.
  
  
• A foreign private issuer listed with the NYSE must disclose any significant ways in which its corporate governance practices differ from the NYSE listing standards.

Establishing New Control and Enforcement Mechanisms.

• Each year, a company’s CEO must certify that the company has established and complied with procedures for verifying the accuracy and completeness of information provided to investors and that he or she has no reasonable cause to believe that the information provided to investors is not accurate and complete.  The CEO must also certify that he or she has reviewed such procedures and the company’s compliance with them with the board of directors.
  
  
• Each year, a company’s CEO must also certify that he or she is not aware of any violations of the NYSE listing standards by the company.
  
  
• The NYSE, upon a finding of a violation of an NYSE listing standard, may issue a public reprimand letter to any listed company.  Such a finding may ultimately lead to the suspension or de-listing of an offending company.

Improving the Education and Training of Directors.

• Each company should establish an orientation program for new board members to familiarize new directors with the company’s strategic plans, significant financial, accounting and risk management issues, compliance programs, conflicts policies and other controls, principal officers and internal and independent auditors.
  
  
• The NYSE, in conjunction with leading authorities in corporate governance, should develop a “Directors Institute” that would offer continuing education forums throughout the United States for both current and newly-elected directors.

Recommendations to the SEC and Congress.

In addition to the recommendations the Committee made to the NYSE regarding its listing standards, they also made recommendations for corporate governance reform to the SEC and Congress relating to the following areas:

• accounting and auditing, to ensure meaningful accurate and credible financial reporting;
  
  
• disclosure requirements, to ensure that material information is clearly and promptly disclosed; and
  
  
• methods of holding officers and directors of public companies more accountable to their shareholders.

Following a two-month period during which the public may comment on the Committee’s recommendations, the NYSE Board of Directors will take final action on the Report at its August 1, 2002 meeting.  The NYSE is planning to address technical issues, such as transition rules and exceptions for specialized securities, upon approval of the Report by the NYSE Board of Directors.

FURTHER INFORMATION

This Alert summarizes and highlights information contained in the Report released by the NYSE Corporate Accountability and Listing Standards Committee.  A copy of the Report is available at http://www.nyse.com/.  Haynes and Boone attorneys have been working extensively with public company boards and audit committees to help implement guidelines that will satisfy the NYSE and Nasdaq proposals.  If you would like to comment on the Report, or if you have any questions concerning this Alert or would like assistance in connection with corporate governance matters discussed in this Alert, please feel free to call your regular Haynes and Boone attorney, or Arthur S. Berner at +1 713.547.2526 or Darrel A. Rice at +1 214.651.5969. 

This Alert is a publication of Haynes and Boone, LLP and should not be construed as legal advice on any particular facts or circumstances.  This Alert is for general informational purposes only, and may not be quoted or referred to in any other documents or legal proceeding without our prior written consent.  The publication of this Alert is not intended to create any attorney-client relationship.