Governance Changes at Two Exchanges

SEC signs off on corporate-governance regulations at the Big Board and Nasdaq. Meanwhile, NYSE rolls out a new board slate, including Madeline Albright and the chairman of TIAA-CREF, and Dean Foods gets an unwelcome letter.


The Securities and Exchange Commission finally approved new rules proposed by the New York Stock Exchange and Nasdaq aimed at strengthening the corporate governance of their listed companies.

Similar for both exchanges, the new rules set up a “stricter, more detailed definition of independence for directors,” according to the commission. The rules also require independent directors to oversee processes relating to corporate governance, auditing, director nominations, and compensation.

Most of the new provisions go into effect by October 31, 2004 or following a company’s first annual shareholders meeting after January 15, 2004, whichever is earlier. Foreign private issuers and small business issuers have until July 31, 2005.

Key provisions proposed by NYSE and Nasdaq included:

  • The board of directors of each listed company must consist of a majority of independent directors.
  • Non-management directors of each company must meet at regularly scheduled executive sessions without management.
  • Each company must have a nominating and corporate governance committee composed entirely of independent directors.
  • Compensation committees must be composed entirely of independent directors.
  • Companies must have an audit committee consisting of at least three people and composed entirely of directors that meet specified independence standards.
  • Each company must have an internal audit function.
  • Each company must adopt and disclose corporate governance guidelines that address: director-qualification standards; director responsibilities; director access to management and, when they’re needed, independent advisors; director compensation; director orientation and continuing education; management succession; and annual performance evaluations of the board.
  • Each company must adopt and disclose a code of business conduct and ethics for directors, officers, and employees. They must also promptly disclose waivers of the code for directors or executive officers. The most important topics that should be addressed by codes include conflicts of interest; corporate opportunities; confidentiality of information; fair dealing; protection and proper use of company assets; compliance with laws (including those covering insider-trading ), rules, and regulations; and the encouragement of whistle-blowing.

Each year, company chief executive officers must certify to the NYSE that they aren’t aware of any company violation of the exchange’s corporate- governance listing standards. This certification must be disclosed in the company’s annual report.

The SEC also approved a few rules proposed only by Nasdaq also has a few of its own rules. For instance, companies on that exchange must adopt a formal, written, audit-committee charter. They must also specify the committee’s purpose: overseeing the accounting and financial reporting processes and the audits of the financial statements of the company.

Companies that get a going-concern qualification as part of their audits must announce that publicly.

“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,” said SEC Chairman William Donaldson.

NYSE Rolls Out New Board Slate

Meanwhile, in a move aimed at shoring up its governance standards, the NYSE named eight candidates for a new, independent board of directors that would replace the current board and proposed changes in the board’s structure. The incumbent board has faced heavy criticism for the hefty compensation package it awarded to former chairman Richard Grasso.

The eight proposed candidates for election to a reconstituted board include: Madeleine Albright, former U.S. secretary of state; Herbert Allison, Jr., chairman of pension fund giant TIAA-CREF; Sir Dennis Weatherstone, a former executive of bank J.P. Morgan; Euan Baird, retired head of Schlumberger Ltd.; Robert Shapiro, retired head of Monsanto Co.; Marshall Carter, retired head of State Street Corp.; Shirley Anne Jackson, head of Rensselaer Polytechnic Institute; and James McDonald, chief executive of Rockefeller & Co.

If elected, these members will serve until June 2004. After that, the entire board will stand for election each June.

The current board “did not serve the institution well,” John Reed, the interim NYSE chairman, reportedly said at a press briefing. All 27 members of the NYSE’s current board have been asked to resign, and a majority already have resigned, according to Reed.

Retaining full fiduciary responsibility, the new board would oversee regulation, governance, compensation, and internal controls, according to an NYSE proposal.

The directors would also name an executive board, who regularly and discuss NYSE marketplace operations, membership, listed-companies, and public issues relating to market structure and performance.

Further, the board would pick a chief regulatory officer who would report to the board’s Regulatory Oversight Committee, rather than the Exchange’s CEO.

Dean Foods Receives Wells Notice

Dean Foods Company said it received a Wells Notice from the SEC, indicating that the SEC is considering bringing a civil case against the company.

The notice charges that Dean Foods, the largest U.S. dairy processor, helped The Fleming Companies speed up its revenue recognition.

Dean said two officers of the Dean Dairy Group subsidiary have also received notices containing the same allegations. No corporate executive officers are involved, according to the company.

The SEC believes that the company allowed Fleming to characterize two payments made by Dean Foods to Fleming as current income rather than deferred revenue to be recognized over future periods, Dean said.

There is no allegation by the SEC regarding Dean Foods’ financial statements, according to a company press release.

The payments in question totaled $2.7 million and were treated as expenses by Dean Foods when they were made in the second and third quarters of 2002, the company added.

Under the Wells process, Dean Foods can respond in writing before the SEC makes a formal decision regarding what action, if any, should be taken.

The company said it intends to cooperate fully with the SEC in the investigation and that it does not expect this matter to have any material impact on the company.

Junk Pile Rises in October

The global default rate for junk bonds rose slightly at the end of October, to 5.41 percent, from a revised rate of 5.35 percent a month ago, according to Standard & Poor’s.

The current rate, however, is down from 6.27 percent six months ago.

The default rate among issuers of speculative-grade bonds continues to hover above the long-term average of 5.17 percent, according to the credit rating agency said. “At least in the U.S., the rising proportion of lower grade issuance (‘B-‘ or lower) serves as an early warning of renewed default pressure two to three years ahead,” said Diane Vazza, head of S&P’s Global Fixed Income Research group said.

Extras in Tuesday’s Paper

Meanwhile, Tuesday was a very strong day for investment-grade issuers, as four companies raised more than $4 billion.

U.S. Bank NA, for example, issued $1 billion of three-year notes, up from an originally planned $750 million. The deal, underwritten by Bear Stearns and Lehman Brothers, was priced to yield 2.853 percent, or 59 basis points over Treasurys and was rated Aa2 by Moody’s and AA by S&P.

Fannie Mae sold $1.5 billion in 10-year subordinated notes, up from an originally planned $1 billion. The notes were priced to yield 5.231 percent, 92 basis points over Treasurys.

SLM Corp., a provider of student loans, issued $1 billion in 5-year global notes, led by Banc One Capital Markets Inc., Citigroup and Merrill Lynch. They were priced to yield 4.053 percent, 79 basis points more than comparable Treasurys. The notes were rated A2 by Moody’s and Single-A by S&P.

Finally, J.P. Morgan Chase priced $750 million of seven-year notes through the company’s underwriting unit. The offering was priced to yield 4.539 percent, or 76.5 basis points over Treasurys. The paper was rated A1 by Moody’s and A-plus by S&P.

Short Takes

  • Schering-Plough Corp. named Robert J. Bertolini CFO and executive vice president, effective Nov. 17. He was previously the lead partner in PricewaterhouseCoopers’ Global Pharmaceutical Industry. Bertolini succeeds Jack L. Wyszomierski, who is leaving the company to pursue other interests.
  • Duke Realty Corp said it would split the roles of chairman and CEO next year. Under the plan, Tom Hefner, the current chairman and CEO, who said he would leave the company in about 18 months, will give his CEO post in April 2004 to Denny Oklak. The latter is Duke’s current president and chief operating officer.
  • Carl Icahn received approval from regulators to buy up to $500 million worth of shares in Eastman Kodak, according to press reports citing a Kodak spokesman. If he were to buy $500 million worth of stock, he would own about 7 percent of the company.
  • Federal prosecutors said on Tuesday they would pursue a new trial against Frank Quattrone, the former Credit Suisse First Boston investment banker whose first trial on obstruction of justice and witness tampering charges resulted in a hung jury.
  • Newmont Mining Corp. said it will raise about $1 billion, triggering rumors that the world’s largest gold producer is planning to make a major acquisition.

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