Subject to phase-in rules and some exceptions, every IPO company needs a board of directors that satisfies SEC and stock exchange requirements for independence. Independence standards are going to become more stringent for compensation committee members, beginning with an IPO company's initial stock exchange listing.
The Dodd-Frank Act directs the SEC to require the stock exchanges to adopt listing standards enhancing the independence requirements for compensation committee members. In June 2012, the SEC adopted Rule 10C-1, requiring the stock exchanges to have in effect by June 27, 2013 listing standards that prohibit the initial or continued listing of a company unless each member of the compensation committee is an independent director. The definition of "independence" is left to each exchange to decide by rulemaking.
In late September, Nasdaq and the NYSE each issued proposed listing standards implementing Rule 10C-1:
- Nasdaq proposed to require that compensation committee members may not accept, directly or indirectly, any consulting, advisory or other compensatory fee from the company (other than board fees and fixed amounts under a retirement or deferred compensation plan relating to prior service). This is the same standard that applies to audit committee members.
- The NYSE did not propose to adopt a total prohibition of this nature, or any bright-line rule. Instead, the NYSE proposed to require boards to consider the source of compensation of a director, including any consulting, advisory or other compensatory fee paid by the company, as part of the board's affirmative determination of the independence of members of the compensation committee.
Both Nasdaq and the NYSE proposed to require boards to consider the affiliate status of any director who serves on the compensation committee, while making it clear that they do not believe stock ownership itself automatically impairs independence. Both exchanges noted that significant stock holdings could serve to align a director's interests with those of other stockholders.
Controlled companies, smaller reporting companies, companies that are not listed on a stock exchange and foreign private issuers that are not required to have an independent compensation committee will not be subject to the new listing standards adopted by Nasdaq and the NYSE.