The Securities and Exchange Commission on Tuesday approved stricter corporate governance standards for more than 6,000 companies that list their stock on the Nasdaq Stock Market and the New York Stock Exchange.
The new rules require that the boards of listed companies have a majority of independent directors and comply with a more detailed definition of independence, an SEC news release said. The standards also put independent directors in charge of corporate governance, audits, director nominations and compensation.
"These rule changes are at the core of a broad movement by our markets to enhance the corporate governance practices of the companies traded on them," SEC Chairman William H. Donaldson said. "Investors will recognize significant benefits from these actions today and long into the future."
The listing rules come as the NYSE, the world's largest stock exchange, wrestles with questions about the independence of its own board after the disclosure of former Chairman Richard Grasso's compensation package. The NYSE and Nasdaq originally proposed the listing standards more than a year ago in a bid to restore investor confidence after accounting scandals at Enron Corp. and other companies.
The NYSE and Nasdaq have been making adjustments requested by the SEC to "harmonize" the two sets of rules, a process that delayed SEC approval, said Robert Todd Lang, a securities lawyer at Weil, Gotshal & Manges in New York.
"The SEC has tried to narrow differences between the markets' standards to avoid bottom-shopping by companies looking for lower standards," Lang said.
NYSE and Nasdaq officials didn't return calls seeking comment.
Under the new listing standards, independent directors may not be employed by the company; neither they nor their immediate families may receive more than $100,000 a year in direct compensation from the company; and none of the directors' family members may be an executive officer of the company.
Directors cannot meet the independence requirements if they are an executive officer at another company with significant ties to the listed company, the SEC said. Independent directors must meet on corporate-governance issues on a regular basis without management present.
Lang said many public companies have begun to make the governance changes required by the new rules. "A lot of this has been anticipated," he said. "The proposals have been out for a while, and companies have put many of these standards into effect already even though they weren't required to do it."