NYSE/Nasdaq independence requirements for members of the corporate governance/nominating committee and compensation committee
Members of the nominating/corporate governance and compensation committees1 do not need to meet Sarbanes-Oxley requirements for independence, but must meet independence (and certain other) requirements under the NYSE/Nasdaq rules.
| Board Committee Function | NYSE | Nasdaq |
Nominating/Corporate Governance (referred to only as the Nominating Committee in the Nasdaq rules) | Each member must be independent under the NYSE’s listing standards. See NYSE Rule 303A.04. | A Nasdaq-listed company must establish a process for selecting board nominees by independent directors – either a committee of independent directors or a majority of the full board. See Nasdaq Rule 5605(e)(1) Note that in exceptional and limited circumstances one of the three committee directors may be a director who is not independent, subject to certain conditions and a two-year cap on service. See Nasdaq Rule 5605(e)(3) |
| Compensation | Each member must be independent under the NYSE’s listing standards. See NYSE Rule 303A.05. As of July 1, 2013, compensation
committee members must satisfy additional independence requirements as set forth
in NYSE Rule | An issuer must have, and certify that it has and will continue to have, a compensation committee comprised of at least two independent directors who may not accept directly or indirectly any consulting, advisory or other compensation from the issuer or any of its subsidiaries. See Nasdaq Rule 5605(d)(2)(A) Note that in exceptional and limited circumstances one of the three committee directors may be a director who is not independent, subject to certain conditions and a two-year cap on service. See Nasdaq Rule 5605(d)(2)(B) |
* For a printable version of this chart, click here.
Considerations for companies that have recently completed an IPO
Note that newly listed companies that have just closed an IPO generally must comply with the NYSE/Nasdaq listing standards as soon as they are listed. However, except as noted below with regard to Nasdaq, newly public companies are allowed to phase-in compliance with committee (audit, nominating and compensation) and majority board independence requirements. (Rule 10A-3 also provides a phase-in period for audit committees.):
- Upon initial listing – one independent director required on each committee.
- 90 days after initial listing – majority of independent directors required on each committee.
- One year after initial listing – full compliance with committee independence requirements required and majority of independent directors on the full board required.
(See NYSE Rule 303A.00 Effective Dates/Transition Periods and Nasdaq Rule 5615(b)(1).) Under the Nasdaq Rules, a company may decide not to have independent compensation and nominating committees, but rather to carry out these functions via a majority independent board of directors.
Considerations regarding “controlled companies”
Generally, under the NYSE/Nasdaq Rules, “controlled companies” – those where more than 50% of the voting power for the election of directors is held by an individual, a group or another company (see NYSE Rule 303A.00 “Controlled Companies” and Nasdaq Rule 5615(c)) – are exempt from certain of the board and committee independence and other listing requirements. (See NYSE Rule 303A.00 “Effective Dates/Transition Periods” and Nasdaq Rules 5615(b), 5605(d) and 5605(e)) and IM-5615-5.) Companies that are no longer “controlled companies” (and companies emerging from bankruptcy, which we don’t cover here) have similar phase-in periods under the NYSE/Nasdaq Rules as those discussed above for companies that have recently completed IPOs.
Under the NYSE and Nasdaq Rules, a company that ceases to be a controlled company is permitted to phase in compliance with the independence requirements for the nominating and compensation committees and has twelve months to comply with the majority independent board requirement.
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1 We cover independence requirements for directors and members of the audit committee here.