Corporate Governance

The Board of Directors and Super-Independence

By J Robert Brown Jr.

The Commission, in settling the case with Bank of America (which still must be approved by Judge Rakoff), negotiated some corporate governance provisions, some of which were designed to add integrity to the compensation process.  One of the changes was to require greater independence on the compensation committee.  Specifically, BofA must:

• IT IS HEREBY FURTHER ORDERED, ADJUDGED, AND DECREED that defendant BAC shall adopt an independence requirement for members of the Compensation Committee of BAC's Board of Directors ("Compensation Committee") according to the independence standards set forth in Section 10A(m)(3)(B) of the Exchange Act [15 U.S.C. §78j-1(m)(3)(B)]. Such independence standards shall require BAC to include as members of the Compensation Committee only those members who will not, directly or indirectly, accept any consulting, advisory or other compensatory fee from BAC or any affiliate or subsidiary of BAC, irrespective of the size or materiality of such fee, other than compensation in the member's capacity as a member of BAC's Board of Directors or be an affiliated person of BAG or any of BAC's subsidiaries. BAC shall maintain such a requirement for a period of three (3) years following entry of this Final Judgment.

In other words, the compensation committee must meet the same definition for "independent" applicable to the audit committee, a requirement imposed under SOX.  See Section 301 of SOX.  The definition more or less prohibits directors from receiving payments of any kind from the company except fees.  The Commission has labeled the definition "super-independence." 

This is in contrast to the rules of the NYSE that allow directors to receive payments of up to $120,000 without losing their status as independent.  See NYSE 303A.02 ("The director has received, or has an immediate family member who has received, during any twelve-month period within the last three years, more than $120,000 in direct compensation from the listed company, other than director and committee fees and pension or other forms of deferred compensation for prior service").

The definition in SOX and applicable to BofA's compensation committee still does not take into account friendship or fees.  (One might argue that in fact the NYSE definition does take fees into account but that the definition is not enforced).  In other words, directors are not allowed to accept consulting fees from the company but can accept fees that are in the high six figures.

Nonetheless, the SEC's settlement in this case begs an important question.  Shouldn't the audit committee definition be applied to all of the required committees of the board (nominating, compensation and audit), to ensure greater director independence?  Perhaps it is a requirement that the SEC should encourage the exchanges to implement, rather than impose it on one company for three years.

The primary materials, including the proposed settlement, can be found at the DU Corporate Governance web site.

Full post as published by The Race to the Bottom on February 16, 2010 (boomark / email).