In Search of Director Independence

Companies will have two years to comply with the NYSE proposals after they are approved by the Securities and Exchange Commission. As of Oct. 4, an SEC spokesman said the exchange hadn't sent a version of the NYSE's proposal to the Federal Register for publication. Meaning, the public comment period, the first step toward an SEC vote, is still to come. (Similar proposals for independent audit committees are key elements of the Sarbanes-Oxley Act, which overhauled rules for corporate disclosure and toughened penalties for corruption. Also, the National Association of Securities Dealers, parent of the Nasdaq, has also issued proposals that in some regard are tougher than the Big Board's.)

"Mandating honesty is kind of a losing battle; you either are or you aren't," said Linda Selbach, proxy manager for Barclays Global Investors in San Francisco. "It all comes down to enforcement, penalties for violations and resources for detecting lack of [compliance.] That's going to be a hard one for the stock exchanges to really take on because of the competition between them [for listings]. It's going to be hard for them to speak out against member companies."

What It's Come To

That leaves enforcement up to the SEC, which is busy these days with other issues. While generally applauding efforts by the major exchanges to address governance issues, Selbach also wondered about the requirements that independence be certified. "That should go without saying," she said. "It's a sad comment on where we are, that we have to ask, 'Are your fingers crossed?'"

Selbach's also criticizes the NYSE's proposal for exempting "controlled companies" -- those with more than 50% of voting power held by an individual, group or other company. Additionally, while giving shareholders an increased say in executive compensation, she noted with some disappointment that the Big Board's proposal exempts "employee-inducement awards and options; plans relating to mergers and acquisitions; and tax qualified and excess benefits plans."

Some shareholder rights groups see other conspicuous omission in existing proposals to reform corporate boards, namely a contingency to allow shareholders "ballot access" to elect dissident board members. A group called the Committee of Concerned Shareholders has co-sponsored a petition for changes to SEC Rule 14a-8(i) that would allow investors to have far greater say in the electing of directors. An SEC spokesman declined to comment on the petition, and few governance experts believe it's going to get any easier to elect an alternative slate of directors going forward.

Meanwhile, Patrick McGurn, vice president and special counsel at Institutional Shareholder Services, a provider of proxy voting and corporate governance services, is concerned about the unintended consequences of the reform effort.