By July 1, 2013, companies listed on the New York Stock Exchange (“NYSE”) and NASDAQ Stock Market (“NASDAQ”) must comply with new listing standards relating to compensation committees and their responsibilities and authority with respect to outside advisers. In view of the upcoming deadline, listed companies should review and update their compensation committee charters to provide the committee with these responsibilities and authority. In addition, compensation committees will need to assess the independence of their advisers in the coming months so they can receive advice from them after July 1.
Action Items for NYSE Companies
By July 1, NYSE companies will need to amend the compensation committee charter to include the following additional responsibilities and authority:
- having the authority, in the committee’s sole discretion, to retain or obtain the advice of compensation consultants, outside counsel or other advisers;
- being directly responsible for the appointment, compensation and oversight of the work of any compensation consultants, outside counsel or other advisers retained by the committee;
- receiving appropriate funding from the company, as determined by the committee, for payment of compensation to any compensation consultants, outside counsel or other advisers retained by the committee; and
- assessing the independence of any compensation consultants, outside counsel or other advisers that provide advice to the committee, before selecting or receiving advice from them, based on the factors set forth in the listing standards.
Action Items for NASDAQ Companies
By July 1, NASDAQ companies, like NYSE companies, will need to provide their compensation committees with the additional responsibilities and authority set forth above. We anticipate that NASDAQ companies will address these new requirements by amending their charters. Although the NASDAQ listing standards also allow companies to satisfy these requirements on an interim basis by adopting a board resolution, we expect this approach will be useful only for those few NASDAQ companies that do not yet have a compensation committee charter.
Because the NASDAQ listing standards require the charter “to specify . . . the specific compensation committee responsibilities and authority” described above, questions have been raised about whether the charter must set forth the specific factors that the committee will have to consider in assessing the independence of advisers. According to informal guidance we received from the NASDAQ staff, the charter need not include these factors. A cross-reference would be sufficient. The NASDAQ rules also require the charter to specifically address the existing NASDAQ requirement that the chief executive officer may not be present during voting or deliberations on his or her compensation.
Adviser Independence Assessment
Beginning July 1, compensation committees will need to have conducted an assessment of adviser independence before receiving advice from an outside adviser or retaining a new adviser. This requirement applies to any compensation consultant, outside counsel or other adviser that “provides advice” to the committee, including advisers retained by management. This requirement applies only to advisers to the compensation committee, but is not limited to advisers providing advice on executive or director compensation matters. There are interpretive questions about what it means to “provide advice,” and this may depend on the facts and circumstances. Because of this uncertainty over what may constitute the provision of advice to the committee, in many cases it may be best for the compensation committee to review the independence factors with respect to any consultants, outside counsel or other advisers that work regularly with management or the committee on executive compensation matters and other matters that fall within the committee’s areas of responsibility. Compensation committees may conduct the assessment at a meeting prior to July 1, or at the first regularly scheduled meeting after July 1 provided that they do not receive advice from advisers in the interim. After the initial assessment, compensation committees should conduct a similar assessment at least annually. Importantly, the listing standards do not require that the compensation committee use only independent advisers or that the committee make a determination about whether the advisers are independent after reviewing the relevant factors.
Looking Ahead to 2014
The new listing standards include additional requirements relating to compensation committees that take effect on the earlier of a company’s first annual meeting after January 15, 2014 or October 31, 2014. By this deadline, both NYSE and NASDAQ companies must comply with new independence standards applicable to compensation committee members.
In addition, by this deadline, NASDAQ listing standards will require all companies to have a compensation committee, which must consist of independent directors and have a written charter that addresses the matters specified in the NASDAQ listing standards. These matters include the responsibilities and authority with respect to advisers discussed above.