Computer Sciences Corporation
May 5, 2003
Jonathan G. Katz, Secretary
Re: File No. SR-NYSE-2002-33
FILED ELECTRONICALLY (firstname.lastname@example.org)
Dear Mr. Katz:
Computer Sciences Corporation ("CSC") respectfully submits the following comments regarding the Securities and Exchange Commission's ("the Commission") "Notice of Filing of Proposed Rule Changes and Amendment No. 1 Thereto by the New York Stock Exchange, Inc. ("the NYSE") Relating to Corporate Governance," Subject File No. SR-NYSE-2002-33 ("the Amendment").
We concur that effective corporate governance and improved investors' confidence in our financial markets and economy rely heavily on the service of competent, ethical directors. We also appreciate the balance the NYSE and the Commission are trying to strike in their rulings development effort to avoid deterring good and professional people from serving as directors because of an overly prescriptive rule system. However, our analysis of the Amendment has surfaced several concerns, observations and suggestions we would like to submit to the Commission to further enhance corporate governance, while maintaining a balance between benefits of the proposed rules and the related costs.
Our main concerns involve directors' independence, committee authorities and duties, the CEO representation regarding listing standard violations and reprimand letters.
Regarding directors' independence standards under Section 303A(2), we suggest the NYSE's proposed definition of "immediate family" (i.e., inclusion of three generations of in-laws) is overly inclusive and would be extremely costly to monitor in relationship to the benefits it could provide. Also, it is inconsistent with the Commission's definition of immediate family, which excludes the "in-laws." While we agree with the Commission's definition, we suggest that, if adopted, clarification should be given as to why the NYSE's proposal differs from the Commission's.
Also, the presumption that "... a director who is affiliated with or employed by ... a present or former internal or external auditor of the company is not independent..." under the same Section 303A(2) has not been sufficiently defined or explained by the NYSE. As written, the Amendment does not indicate why a relationship with the internal auditor would compromise the director's independence, nor does it define "external auditor" with sufficient specificity. For example, does the NYSE refer to the issuer's Primary External Auditor who expresses an opinion on the issuers consolidated financial statements or to any other external auditor expressing perhaps an opinion only on the financial statements of a subsidiary or pension plan of the issuer, or the controls of a data center?
Section 303A(5) grants the Compensation Committee "sole authority" to determine CEO compensation. We believe the full Board (with CEO abstention) should have final authority, providing the Committee with the advice and experience of the other directors.
Similarly, Section 303A(7) grants the audit committee sole authority to "appoint, retain, compensate, evaluate and terminate the company's independent auditors." We agree oversight of the relationship with the independent auditor should be independent of management, but final authority should rest with all of the independent directors. In this manner, listed companies take full advantage of the knowledge and expertise of all independent directors.
The NYSE's proposed six-month transition period for audit committee standards and the Commission's transition rules implementing section 301 the Sarbanes-Oxley Act of 2002 (i.e., compliance required by the 1st shareholders meeting after January 15, 2004), are inconsistent. The NYSE has de facto accelerated the Commission's requirements. We recommend the Commission and the NYSE coordinate their respective effective dates and transition periods to minimize confusion, interpretation oversights and, more importantly, the cost to listed companies and their shareholders of implementing rules and listing standards.
The proposed standards also require the audit committee to discuss SEC filings and earnings releases, as well as financial information and earnings guidance provided to analysts and rating agencies. Listed companies issue numerous press releases during the year and provide financial and other information to many analysts, including technical product analysts.
Further, the audit committee would be required to review with the independent auditor "any" audit problems or difficulties and management responses. The related commentary states the audit committee may want to review with the auditor "any" accounting adjustments that were noted or proposed by the auditor but were "passed" as immaterial or otherwise. The wording suggests the audit committee should discuss even a one-dollar adjustment. For companies of the size and quality to be listed on the NYSE, this proposal would force audit committees to waste inordinate amounts of time discussing unimportant items.
An overly prescriptive, compliance-oriented agenda will undoubtedly lead to a "check list" approach to corporate governance instead of a proactive, responsive audit committee. An effective audit committee needs the flexibility to set its agenda to focus on the company's most significant financial reporting and corporate governance issues.
Under Section 303A(12), the CEO is required to "certify" to the NYSE each year that he or she is not aware of any violation by the company of NYSE corporate governance listing standards. We recommend obtaining the CEO's "representation" rather than "certification". A certification implicitly contains a higher standard of exactness than a representation and we believe such standard cannot be met given the myriad of rules and standards facing listed companies.
Finally, we have many serious reservations on the proposed Section 303A(13), which would permit the NYSE to issue a public reprimand letter regarding any listed company which in the Exchange's view has violated a listing standard. A provision for due process prior to issuance of a reprimand letter is necessary for fact checking and opportunity to remedy. We would appreciate additional clarity and strongly recommend this section be researched and revised separately from the current proposal.
Thank you for the opportunity to comment on this important proposal and for your consideration of our comments and suggestions.
cc: Mr. Richard A. Grasso, New York Stock Exchange