The NYSE and the Problems of Director Independence: The Plain Meaning of NYSE 303A.02 (Part 2)

We are examining problems with the NYSE definition of independent director in the context of the merger between Black & Decker and Stanley Works.  The merger was approved by 99% of the shares voted at the meeting.

The NYSE has a definition of director independence that, on its face, turns entirely upon the director's relationship to the company.  Specifically, NYSE 303A.02 provides that "[n]o director qualifies as 'independent' unless the board of directors affirmatively determines that the director has no material relationship with the listed company" (emphasis added). 

The focus on "listed company" suggests that the NYSE does not require boards to screen for material relationships among directors.  Thus, under this approach, a director with a material business relationship with the CEO would still be considered independent. 

This plain language reading came up in connection with the merger between Black & Decker and Stanley Works.  As was reported in an article in the WSJ, the boards of both companies approved an unusual post-merger compensation package for the CEO of Black & Decker, Nolan D. Archibald.  Part of his compensation included a "cost synergy bonus" of $45 million if, in the aftermath of the merger, Archibald met certain expense-reduction targets.

As the WSJ reported, the board at  Black & Decker formed a three person special committee to consider the merger and to "sign[] off on Mr. Archibald's pay."  The committee consisted of three directors, Anthony Burns, Benjamin H. Griswold IV and Robert L. Ryan.  According to the Registration Statement, the directors were all "independent." 

As the Registration Statement noted, these independent directors were chosen "by the Corporate Governance Committee of the Black & Decker board, following, among other things, discussions between Mr. Archibald and Manuel A. Fernandez, the Chairman of the Corporate Governance Committee."  In other words, the beneficiary of the compensation package participated in the selection of the independent directors on the committee. 

The WSJ further revealed that one of the independent directors, Burns, had an outside business relationship with Archibald.  As the article described, the two directors "jointly own Red Ledges, a luxury recreational community being built in Heber City, Utah, with a golf course designed by Jack Nicklaus. The cost of developing the project is expected to be more than $200 million, according to people familiar with the matter."

When presented with the information, Black & Decker issued a press release disclosing the relationship.  The release also explained why the information had not been disclosed earlier.  And the reason for not disclosing the relationship sooner?  Business relationships among directors weren't required to be disclosed under the NYSE listing standards or under the independence standards approved by the board of Black & Decker.

• Personal business relationships between individuals (as opposed to relationships with the company) generally are not relevant to the independence tests under the New York Stock Exchange rules because they do not create a material relationship between a director and the company. Similarly, personal business relationships between directors are not identified in Black & Decker’s Corporate Governance Policies and Procedures Statement as the type of relationship that impairs a director’s independent judgment. The Corporate Governance Committee of the Black & Decker Board of Directors monitors the independence of directors by reviewing any relationship or transaction in which Black & Decker and a director are participants that may impede a director’s independence or must be disclosed in accordance with the rules and regulations of the Securities and Exchange Commission. The Red Ledges project does not involve Black & Decker or any transactions with Black & Decker and therefore was not considered by the Black & Decker Board of Directors in reaching its determination regarding the independence of Mr. Burns.

In other words, according to Black & Decker, the rules of the NYSE did not require the board to consider business relationships among directors.  Moreover, the statement all but acknowledged that these relationship are not reviewed by the board of directors. 

The position indicates that public companies traded on the NYSE interpret the NYSE rule concerning director independence in a manner consistent with its plain meaning -- that it screens only for relationships between a director and the company, not relationships among directors/officers.  While this is one public example, there are no doubt others.  Thus, NYSE traded companies may characterize as independent directors who have significant business and financial ties with officers and directors.