As required by the Dodd-Frank Act and related SEC rules, the NYSE has issued proposed new listing standards related to compensation committee independence and responsibilities. The NYSE’s proposed standards are based on the SEC’s rules and make substantial use of the discretion that the SEC gave to the exchanges in implementing its rules. Most notably, the NYSE is not proposing any additional mandatory independence conditions for compensation committee members. Instead, the NYSE has chosen to add factors that boards must consider in determining compensation committee independence.
We note that Nasdaq has also issued its corresponding proposed new listing standards, which differ in significant ways from the NYSE’s proposal. For example, Nasdaq proposes to add a new mandatory prohibition against compensation committee members’ accepting directly or indirectly any compensation from the company or its subsidiaries (other than directors’ fees or certain fixed retirement payments). For more information on Nasdaq’s proposals, see our memorandum on that topic at http://www.paulweiss.com/media/1203628/1-oct-12nas.pdf.
Compensation Committee Independence
The NYSE proposes to require boards, in determining the independence of compensation committee members, to consider (in addition to existing independence requirements) all factors specifically relevant to whether the director has a relationship with the company that is material to his or her ability to be independent from management in connection with compensation committee duties, including, but not limited to, the following two specified factors:
- Any compensation received by the director from any person or entity (including any consulting, advisory or other compensatory fee paid by the company to such director) and
- The director’s affiliate relationships with the company, a subsidiary of the company or an affiliate of a subsidiary of the company.
The NYSE suggests that the board should examine the above factors broadly by considering all sources of compensation from any person or entity and any direct relationships with, or other relationships that place the director under the direct or indirect control of, the company or senior management, in each case which would impair the director’s ability to make independent judgments about the company’s executive compensation.
It is unclear at this point what types of compensation or relationships, if any, would be caught by these new factors, especially in light of standards already in place, such as the NYSE’s existing bright line independence tests and arrangements already contemplated by companies’ categorical standards of independence. Notably, the proposing release reiterates the NYSE’s position that share ownership in the company by the director or the director’s affiliates aligns the director’s interests with those of unaffiliated shareholders, and thus, absent other facts that may impair independence, shareholder representatives should be able to remain members of the compensation committee.
The NYSE proposes a cure period if a member of the compensation committee ceases to be independent for reasons outside his or her reasonable control. That director may, with prompt notice to the NYSE, remain a compensation committee member until the earlier of the next annual shareholders’ meeting or one year from the occurrence of the event that caused the director no longer to be independent for compensation committee purposes, and only if a majority of the members of the compensation committee remain independent.
Compensation Committee Responsibilities
The NYSE proposes that compensation committees be authorized, in their sole discretion, to retain or obtain the advice of compensation consultants, independent legal counsel or other advisors and to be directly responsible for the appointment, compensation and oversight of the work of any such advisors. Further, the company must provide appropriate funding, as determined by the compensation committee, for payment of reasonable compensation to these advisors.
When retaining such advisors (other than in-house legal counsel), the compensation committee would be required to consider all factors relevant to the advisor’s independence from management, including the following:
- The provision of other services to the company by the advisor’s employer;
- The fees received from the company by the advisor’s employer, as a percentage of the total revenue of the employer;
- The policies and procedures of the advisor’s employer that are designed to prevent conflicts of interest;
- Any business or personal relationship of the advisor with a member of the compensation committee;
- Any stock of the company owned by the advisor; and
- Any business or personal relationship of the advisor or the advisor’s employer with an executive officer of the company.
The NYSE proposal further states that nothing in its rules should be construed to require the compensation committee to implement or act consistently with the advice or recommendations of any such advisor, or to affect the ability or obligation of the compensation committee to exercise its own judgment in fulfilling its duties.
Any entities that are exempt from or have extended transition periods to comply with the NYSE’s compensation committee rules (e.g., controlled companies, foreign private issuers, limited partnerships, companies in or emerging from bankruptcy, issuers listing only preferred stock, newly listed companies, companies emerging from controlled company status or transferring from other exchanges) would continue to have those accommodations. Also, special accommodations and transition rules apply to smaller reporting companies.
The NYSE proposes that companies will have until the earlier of their first annual meeting after January 15, 2014, or October 31, 2014, to comply with these new requirements. In our experience, most existing NYSE companies have fairly robust compensation committee structures, which already grant the committees the necessary authority and funding with respect to retaining advisors. Thus, most of the changes that boards will need to consider will center on any compensation committee membership, charter or procedure changes necessary to address the compensation committee and compensation committee advisor independence provisions.
These rules have not yet been published by the SEC for public comment.
For a copy of the rule proposal, see: