Corporate Director Independence Rules
In August 2002, the New York Stock Exchange ("NYSE") and NASDAQ asked the Securities and Exchange Commission ("SEC") to examine and rule on specific (and stricter) director independence guidelines for their listed companies. These requests focused on the issue of whether a potential conflict of interest arises when corporations make charitable contributions to nonprofits with which a corporate director is affiliated. After careful consideration, on November 4, 2003, the SEC approved new rules for those corporations that are listed for trading on the NYSE and NASDAQ exchanges. Specifically, the new rules provide guidance on corporate director independence in relation to charitable contributions.
NYSE: Generally, for companies listed on the NYSE, a majority of the board of directors must be "independent". A director will only qualify as "independent" if the board affirmatively determines that such person has "no material relationship" with the listed company, either directly or indirectly through another. Thus, under the new rule, a director's independence can be jeopardized if he or she is closely affiliated with a charitable organization that has received a substantial contribution from the listed company. Accordingly, listed companies must disclose contributions to a charity of which a director serves as an executive officer, where such contributions exceed the greater of $1 million or 2 percent of the charitable organization's annual gross revenues. The listed company's boards must also consider the materiality of such relationships in assessing director independence generally.
NASDAQ: As with the NYSE, the NASDAQ rules require that a majority of the board of a listed company be "independent". Under the NASDAQ's new rules, a director will be disqualified from being considered independent if he or she (or a family member) is an executive officer of a charitable organization that receives the greater of $200,000 or 5 percent of its revenue from the listed company. This is also true for a director(or a family member of a direcgtor) who is an executive officer of a charitable organization that pays an equivalent amount to the listed company. Payments made under a matching gift program do not count in figuring out whether the $200,000 or 5 percent threshold has been met.
Commentary to the NASDAQ proposal states that the exchange "encourages" companies to go beyond automatic disqualification to "consider other situations where a director or their Family Member and the company each have a relationship with the same charity when assessing director independence." This comment suggests that boards should assess whether smaller, but still substantial, gifts impair a director's independence.