Public Service Enterprise Group Incorporated
February 18, 2003
Jonathan G. Katz, Secretary
Re: File No. S7-02-03
Dear Mr. Katz:
Public Service Enterprise Group Incorporated (PSEG or the Company), a New York Stock Exchange (NYSE) listed company registered under the Securities Exchange Act of 1934, with approximately 225 million shares of common stock outstanding, submits the following comments on the Proposed Rule (Proposed Rule) of the Securities and Exchange Commission (Commission or SEC) under Section 301 of the Sarbanes-Oxley Act of 2002 (Act).
The Company generally supports the Proposed Rule. PSEG commends the Commission for moving to improve corporate governance requirements for Audit Committees of listed companies in a way that will enhance protection and confidence of investors, without unduly burdening listed companies or their Audit Committees. While structural requirements and limitations are important in assuring good governance, the key ingredient in a for-profit corporation is the quality of the individuals serving as Audit Committee members.
As a NYSE listed company, PSEG has had an Audit Committee of outside directors for many years. In accordance with current NYSE rules, all members are "independent" and "financially literate", and at least one member has "financial expertise". PSEG believes strongly that an Audit Committee with such attributes is a key element in the quality of a corporation's financial statements. Reasonable measures that strengthen this important body will further improve financial reporting, the integrity of financial statements, and thereby investor confidence.
PSEG is providing herein comments on three topics in the Proposed Rule:
1. Audit Committee Member Independence
As stated, PSEG's Audit Committee currently consists of members who the Board of Directors has determined to be "independent" under the present rules of the NYSE. In satisfaction of this requirement, the Board of Directors of PSEG established requirements for independence and, at least annually, reviews the relationships with Audit Committee members to verify their compliance with the established standards. The definition of independence adopted by the PSEG Board is based upon Section 301 of the Act and the Commission's Proxy Rules defining the business relationships with Directors that must be disclosed in the Proxy Statement (Schedule 14A - Item 7(c); Item 404(b) of Regulation S-K).
PSEG supports the independence standard in the Proposed Rule as drafted. The Company agrees that direct payments to a Board member of any consulting, advisory or other compensatory fee, other than in the individual's capacity as a member of the Board of Directors or a Committee of the Board should preclude that member from being independent for Audit Committee purposes. The Company also agrees that payments to spouses, or to law firms, accounting firms, consulting firms, investment firms or similar entities in which Board members are partners or hold similar positions, should preclude a determination of independence for Audit Committee purposes. While such indirect payments are not "fees" to the Director in the literal sense, and they may not impact a Director's judgment as an Audit Committee member, such payments can have the attributes of an indirect fee arrangement, and therefore could influence a director's decision. It therefore seems appropriate in today's corporate environment to preclude such relationships in order to eliminate the possibility of any such impact and to avoid any appearance of impropriety or taint. PSEG believes that such a requirement will help in restoring confidence in the financial statements of corporations and in their Audit Committees without unduly restricting the availability of qualified persons to serve on Audit Committees.
The Commission has specifically requested comments on whether the definition of independence should also preclude payments in ordinary course business relationships. PSEG believes that a prohibition on Audit Committee membership as a result of "ordinary business" relationships is not contemplated by the Act, is unnecessary, and may be counterproductive. First, normal commercial relationships between business entities do not have the attributes of either fee compensation or control as contemplated by the definition of independence in Section 301 of the Act. Second, from a practical standpoint, this seems to make sense, because such relationships do not have the same potential for affecting an individual's decisions as those involving fees for consulting or advisory services or control relationships.
Further, a prohibition on all commercial relationships for Audit Committee members would severely limit the number of qualified persons available to serve on Audit Committees, particularly those with meaningful business experience, as well as those who might qualify as Audit Committee Financial Experts. As mentioned above, while structural requirements and limitations are important in assuring good governance, the key ingredient in a for-profit corporation is the quality of the individuals serving as Audit Committee members. PSEG believes that allowing ordinary course business relationships is consistent with the statutory definition and strikes the right balance in permitting relationships that are unlikely to affect independence or create an appearance of conflict, without unduly limiting the pool of resources available to serve on Audit Committees, consistent with the Act.
2. Audit Committee Establishment of Complaint Procedure
With respect to procedures for handling complaints, Section 301 of the Act provides:
The Proposed Rule would provide Audit Committees with flexibility regarding the development of procedures for handling complaints. Specifically, the Proposed Rule states:
In this regard, the Commission has asked whether most issuers have procedures for the receipt, retention and treatment of complaints or for the confidential, anonymous submission by employees of concerns regarding questionable accounting or auditing matters. PSEG has a comprehensive compliance program, which is currently relied on by the Audit Committee to meet its responsibility under its Charter to periodically review the status of PSEG's compliance with applicable legal, regulatory and corporate requirements, including those related to accounting, internal controls and auditing. Many corporations have similar programs, which were developed or enhanced as a result of the Sentencing Guidelines for Organizations adopted by the United States Sentencing Commission in 1991.
Promulgation of the Sentencing Guidelines for Organizations and similar guidance issued by various federal and state enforcement agencies, including the SEC, caused most sophisticated organizations to adopt compliance programs that contain the components of an "Effective Compliance Program", as provided by the Sentencing Guidelines and subsequent guidance. These programs typically include a code of business conduct for all employees, mechanisms for employees to report violations without fear of reprisal, procedures for investigating reported violations, processes to ensure appropriate closure to prevent reoccurrence of any identified wrongdoing, oversight by senior management and periodic reporting to the Audit Committee or the Board of Directors regarding program implementation, design and effectiveness. Many programs, including PSEG's, specifically require that a toll free telephone service be maintained where employees may anonymously report suspected violations without fear of reprisal and, further, require periodic certifications by employees that they have read and understand and are in compliance with the code of conduct. PSEG's certification program is administered on a confidential basis by the Company's Internal Audit Services (IAS) department and allows another confidential avenue for employees to report violations. IAS has reporting obligations directly to the Audit Committee and meets formally with the Audit Committee in executive session at least four times per year. The Director of IAS also meets privately with the Audit Committee Chair several times a year.
PSEG submits that such a compliance structure, with a required timely notification to the Audit Committee of any allegations or complaints regarding accounting, auditing or internal control, can satisfy an Audit Committee's obligation under Section 301 of the Act to establish a complaint procedure. To the extent that an Audit Committee receives periodic notice of complaints regarding accounting, internal control or auditing, it may determine that certain such complaints may be investigated by the existing internal structure, while others (e.g. a complaint involving the CEO or CFO) should be investigated by an outside entity, such as a law firm.
PSEG also believes that a single program facilitates employee communication and training, and fosters employee confidence in and respect for the integrity of an organization's program and its commitment to ethics and compliance. It is for this reason that PSEG has included within its code of conduct, called the Standards of Integrity, the code of conduct requirements for senior financial officers required by Section 406 of the Act. Additionally, PSEG's Standards of Integrity includes provisions related to the preparation of the Company's books, financial reporting and the sanctity of the audit process, upon which the Audit Committee currently relies in discharging its responsibilities under its Charter. PSEG believes that if Audit Committees were required in all circumstances to create a separate infrastructure for managing suspected wrongdoing regarding financial reporting, such a requirement would at least be confusing to employees, and would have the potential to create a negative optic among employees concerning the integrity and competence of the Company's compliance program. Such confusion and skepticism could potentially compromise the effectiveness of the organization's overall compliance effort. The inefficiencies of such duplicative processes are obvious.
PSEG submits that for organizations that have established an "Effective Compliance Program" under the United States Sentencing Commission's Guidelines for Organizations and its progeny, such a program can readily provide the process that the Audit Committee needs to meet the requirements of Section 301. Consistent with the Commission's desire for flexibility for Audit Committees in satisfying these requirements, it seem completely reasonable for an Audit Committee to rely on an issuer's existing compliance program, provided that the Committee is satisfied that the program allows for anonymous submission of complaints, provides reporting to the Audit Committee of allegations and complaints relating to accounting, internal control and auditing matters, and provides for the receipt, processing and resolution of complaints and allegations in a manner that the Audit Committee determines to provide an unbiased review. The benefits are obvious: many corporations have such programs, so that there will be no start up lag; utilization of an issuer's existing compliance program will avoid inefficiencies and any risk of compromising the actual or perceived integrity of an organization's existing program; and employees will not be confused by separate programs. Permitting such reliance will also obviate the need to establish a redundant compliance infrastructure for no appreciable benefit or protection of investors.
For the reasons discussed above, PSEG submits that the Commission's Final Rule should confirm that an Audit Committee has the flexibility to utilize an issuer's existing compliance infrastructure to satisfy the complaint procedure requirement contained in Section 301 of the Act.
3. Subsidiary Audit Committees
PSEG supports the Commission's proposed "Multiple Listings" exemption. PSEG owns 100% of the common stock of Public Service Electric and Gas Company (PSE&G), a public utility in the State of New Jersey. PSE&G is consolidated in the financial statements of Enterprise and is a material part of the Company's business. The Board of Directors of PSE&G consists solely of persons who are directors of its parent, PSEG. PSE&G does not have an Audit Committee. PSE&G has listed on the NYSE six series of non-participating, non-voting preferred stock. Such preferred stock is a common financing technique used by utility companies
As a result of PSE&G's importance as a wholly-owned consolidated subsidiary of PSEG, containing approximately 50% of PSEG's consolidated assets and producing approximately 25% of its earnings, the Audit Committee of PSEG devotes substantial attention to the financial statements, accounting requirements, internal controls, and operations of PSE&G. As mentioned above, the Audit Committee of Enterprise consists of independent members who are financially literate under current NYSE rules. At least one member has financial expertise as defined by the NYSE.
A separate Audit Committee for PSE&G consisting of only PSE&G Directors would result in members who, under the current corporate structure, are also directors of PSEG. It is hard to see how this would improve or increase the focus on PSE&G `s financial statements and accounting requirements. As such, there does not appear to be any meaningful additional oversight that would be provided for investors by a requirement for a separate Audit Committee at PSE&G. Requiring such PSE&G Audit Committee members to be independent of PSEG would mandate a complete corporate restructuring at the Board of Directors level. It is also not apparent how such an increase in "independence" of a PSE&G Audit Committee would enhance corporate governance. Similarly, PSEG and PSE&G believe that the Commission should provide that in the case of subsidiary companies that are relying on the "Multiple Listings" exemption, such registrants may satisfy the requirement for pre-approval of audit and non-audit fees under Section 202 of the Act with the parent's Audit Committee.
Since PSE&G only has non-voting, non-participating preferred stock listed on the NYSE, the characteristics of these securities (fixed dividend rates, cumulative dividends and a stated dollar preference upon liquidation), for governance purposes, are closely aligned with those of debt holders. The holders of such securities would receive no additional benefit from a separate Audit Committee.
PSEG also believes the Commission's proposed exemption from the requirement to disclose that an issuer is relying on the "Multiple Listings" exemption is appropriate. Such a disclosure would not appear to provide useful information to preferred stock investors of PSE&G. If any such disclosure were required, in order not to be misleading, the disclosure would also need to state that PSE&G receives the benefits of oversight of the PSEG Audit Committee, which it believes to provide equally as rigorous and independent oversight as would a stand-alone Audit Committee for PSE&G.
If an Audit Committee were required to be established by PSE&G, it would result in duplicative review of much PSE&G information by both the PSEG Audit Committee and a PSE&G Audit Committee. There does not appear to be any enhanced protection for investors or other benefit from such a redundant review that would justify it in light of the increased administrative burden on the corporation. For this and the other reasons discussed above, PSEG and PSE&G support the Commission's "Multiple Listings" exemption, as proposed.
PSEG appreciates the opportunity to comment on the Commission's Proposed Rules under Section 301 of the Sarbanes-Oxley Act of 2002.
s:res&rd\chris\miscltrs\PSEG Comments-SEC ltr 2-03.doc