Skip to main content

The governance standards for public companies are getting a bit tougher.


Securities and Exchange Commission

on Tuesday approved new listing standards proposed by the

New York Stock Exchange

and the

Nasdaq Stock Market

. Among other things, the new standards tighten requirements for independent corporate directors and increase the power of those directors on companies' nominating and compensation committees.

The new rules are not as strict as those initially drawn by the NYSE. But governance experts praised them as significant and important reforms.

"I wish they had gone further, but I think we are a lot further along than we were two years ago," said Charles Elson, a business professor at the University of Delaware who chairs the school's corporate governance center. "I think this is clearly a step in the right direction."

Following the accounting scandals at




and other companies, investors and government officials have pushed for regulations that might have controlled or prevented some of the excesses at those companies. Many have pushed for increasing the power and responsibility of corporate boards as a way to counterbalance the power of company executives and to look out for shareholder interests.

Until this reform, the NYSE had few guidelines for governance at its member companies. The primary requirement for listed companies on the Big Board was that they have an audit committee composed solely of independent directors.

As part of the regulations approved on Tuesday, both the NYSE and the Nasdaq will require most companies listed on their exchanges to have boards of directors within which independent members comprise a majority.

NYSE-listed companies also will be required to have compensation and nominating committees that are composed entirely of independent directors. Meanwhile, the NYSE will require independent directors to meet at least once a year without other directors present.

The exchange further clarified some of its standards for independent directors. Such directors can't be employed by a listed company's internal or external auditors. They also cannot serve as chief executive of a company that pays or receives payments from the listed company greater than $1 million, or 2%, of the listed company's revenue.

The SEC approved similar guidelines at the Nasdaq. The Nasdaq will allow its listed companies to have nonindependent directors on their compensation and nominating committees. But decisions made by those committees concerning executive pay or nominations to the board must be approved by a majority of the independent directors serving on them.

For Nasdaq companies, directors no longer would be independent if they serve as a partner, executive or controlling shareholder of an organization that conducted significant business with the listed company. The Nasdaq will consider the organization to have a significant business relationship with the listed company if the amount of money exchanged between the two exceeds 5% of the recipient's gross revenue or $200,000, whichever is greater.

At both exchanges, the primary exception to the new rules is for so-called controlled companies. At such companies, more than half of the voting power is controlled by an individual, group or another company.

Both exchanges expect their listed companies to begin moving toward compliance with the new rules by January. Both require all affected companies to be in compliance with the new standards by the end of 2005.

At the NYSE, the rules are less strict than originally planned. In that proposal, for instance, it didn't make an exception for controlled companies.

Under the adopted proposal, the exchange will look back three years to see if directors have any qualifications that jeopardize their independence. The original proposal would have called on the exchange to look back five years.

An NYSE representative said the changes from the original proposal came out of various hearings over the last year. While some provisions were softened, others were toughened, the representative said.

The weakening of some of the rules appears to have been part of a quest by the SEC for uniformity between the two exchanges, said Patrick McGurn, special counsel and senior vice president at proxy adviser Institutional Shareholder Services.

"In this quest for uniformity, you sometimes got the lowest common denominator instead of the highest," McGurn said.

Despite this, the new rules already are having a positive effect on corporate governance. Many corporations already have started shaking up their boards and committees to meet the new guidelines, he said.

The new rules also should allow investors to keep a better eye on how companies are being run, McGurn said. In the past, shareholders were forced to argue with corporate management about the process and the make-up of corporate boards, he said. Now investors can focus on the boards' actual decisions, he said.

"It's up to investors to set a new ceiling

for governance," McGurn said. "I think they can do that now because the floor is so much higher than it ever has been before."