On May 30, 2012, NASDAQ filed a proposed rule change with the SEC that would permit non-independent directors to serve on board committees despite having a family member employed by the same company in a non-executive role.The current NASDAQ rules require that certain board committees, specifically audit, compensation and nomination committees, consist solely of independent directors. The same rules exclude specific categories of individuals from independent director status, including:
- directors who were employed by the same company in the previous three years
- directors that are related to a company employee who received compensation in excess of $120,000 in one of the previous three years
- directors that are related to a company employee serving in an executive role
Accordingly, a company may employ the relative of an independent director without eliminating the director's independent status, as long as the employee (1) was not compensated in excess of $120,000 in any of the preceding three years, or (2) did not serve in an executive role.
In December 1999, NASDAQ crafted a small exception to the rule that non-independent directors are prohibited from serving on a company's audit, compensation, or nominations committee. The exception allowed a single non-independent director to serve on a company's audit committee for a two-year period if the company's board, under "limited and exceptional circumstances," believed the appointment was in the best interests of the company and its stockholders. In 2003, the exception was extended to cover compensation and nomination committees.
Yet this exception is not available for a non-independent director who also has a relative employed by the company in a non-executive role. As the relationship to a non-executive employee does not itself eliminate a director's independent status, NASDAQ notes that the proposed rule change corrects an inconsistency. The proposed rule would eliminate the prohibition on a company utilizing the exception for a non-independent director who has a relative employed by the company in a non-executive role.
The proposed rule change does not alter the three basic requirements for utilizing the exception:
- the presence of limited and exceptional circumstances
- an affirmative finding by the board that such circumstances exist and that the appointment of the non-independent director is in the best interests of the company and shareholders
- disclosure of the appointment to shareholders, with the form of disclosure depending on the committee to which the non-independent director is appointed