The SEC has approved new corporate governance standards that will radically change the composition of the boards of many companies listed on NASDAQ.
Most significantly, the board of directors of a NASDAQ-listed company must have a majority of independent directors. The standards also say who can serve on board audit and compensation committees, how board members are to be nominated and what code of conduct listed companies must adopt and enforce.
There is not much time to comply; the deadline for most companies is the first annual stockholders’ meeting after Jan. 15, 2004 or Oct. 31, 2004, whichever applies to a particular company. Small business issuers — those with a public float of less than $25 million — have until July 31, 2005.
The standards for determining director independence may present a formidable obstacle for many companies. A director will not be considered independent if, at any time during the past three years, he or she, or any of his or her family members, has been:
* An employee of the company (as an executive officer, in the case of a family member) or of its parent or subsidiary
* The recipient of payments from the company, its parent or subsidiary of greater than $60,000 (excluding compensation for board or board committee service; payments from investments in the company’s securities; compensation paid to a family member who is a nonexecutive employee of the company, its parent or subsidiary; benefits under tax-qualified retirement plans or nondiscretionary compensation; or loans that do not fall within the category of prohibited personal loans to directors and executives)
* A partner in, or a controlling shareholder or an executive officer of, any organization, including a charitable organization, to which the company made, or from which the company received, payments for property or services that exceed 5 percent of the recipient’s consolidated gross revenue for that year, or $200,000, whichever is greater (excluding payments arising solely from investments in the company’s securities or payments under nondiscretionary charitable contribution matching programs)
* An executive officer of another entity on whose compensation committee any executive officer of the company has served
* A partner of the company’s outside auditor or an employee of the company’s outside auditor who worked on the company’s audit
Companies that don’t have a majority of independent directors should get started implementing these changes. It may be difficult to recruit directors who meet these criteria and who are willing to make the commitment. Briar McNutt is a lawyer with Eckert Seamans Cherin & Mellott, LLC.
