NYSE-Euronext Merger and Board Independence

Let’s take a look at one of the categories of directors that can now be on the board under the independence policy applicable to NYSE Euronext.

Previously, executive officers of listed companies were categorically treated as not independent. As an early release explained, the governance structure would place “responsibility for governance, compensation and internal controls, as well as for supervision of regulation, in the hands of a Board of Directors that is independent both from NYSE management and from the members, member organizations and listed companies.”  Why was that important? “Requiring independence from owner-constituents goes beyond what we expect of public companies, and it aligns the Exchange's Board with the interests of investors.”  The quote is here.

So, the exclusion of executive officers of listed companies was designed to align the board with the interests of investors. Under the NYSE Euronext policy, however, CEOs of listed companies can sit on the board. The only limitation is that they may only be executive officers of a foreign private issuer, which essentially means companies incorporated in a foreign location where a majority of shares are not owned by US citizens/residents. A definition of foreign private issuer is contained in Rule 3b-4 of the Exchange Act. This raises two obvious concerns. First, how does this relate to the prior representation about the best interests of investors? Neither the proposing release nor the adopting release nor a comment letter written by the NYSE LLC contained any explanation of this change in attitude about investors.

What explanation did the NYSE give for the change? “Euronext does not prohibit executive officers of companies listed on Euronext exchanges from serving as directors of Euronext because Euronext does not (and NYSE Euronext will not) regulate these companies in the way that the Exchange regulates its listed companies. The Exchange therefore believes that a categorical requirement prohibiting all executive officers of foreign private issuers listed on the NYSE on NYSE Arca could preclude a large pool of otherwise highly qualified director candidates from serving on the NYSE Euronext board of directors and is not necessary.”  The quote is here.  In other words, the change came about because it is consistent with the Euronext policy.

To the extent that Euronext doesn't regulate listed companies in the same way as the NYSE, that would at best justify a standard allowing membership of executive officers of companies traded on the Eurnext exchanges.  It would not justify the inclusion of executive officers of companies listed on the NYSE.  Foreign private issuers traded on the NYSE are subject to NYSE oversight.  They must adhere to NYSE listing standards, either the Alternative Listing Standards or the listing standards applicable to domestic companies.  See NYSE Manual 103.00.  

Second, to the extent that it is beneficial to allow executive officers of NYSE listed companies on the board of NYSE Euronext, it is unclear why this must be limited to foreign issuers. To the extent that listed company experience is useful, then presumably that experience would come from any CEO of any listed companiy (whether foreign or domestic).