May 15, 2003
I am writing on behalf of Mirant Corporation ("Mirant") to comment on the corporate governance listing standards proposed by the New York Stock Exchange, Inc. ("NYSE"). Mirant commends the NYSE on its efforts to strengthen the corporate governance practices of listed companies. Although Mirant generally supports the proposed listing standards, we are concerned that the definition of "immediate family member" is overly broad in the context of the objective director independence standards proposed by the NYSE.
Proposed NYSE Rule 303A(2)(b) lists a series of four relationships that would disqualify a director of a listed company from being considered independent if the director or any "immediate family member" of the director has any of those relationships with the listed company. The relationships include employment and affiliations with the company's external and internal auditor and employment with corporations that do business with the listed company. The definition of "immediate family member" is virtually identical to that in current NYSE Rule 303.02(A) and includes a director's spouse, parents, children, siblings, mothers- and fathers-in-law, sons- and daughters-in-law, brothers- and sisters-in-law, and anyone (other than domestic employees) sharing the director's home. As the NYSE notes in its rule filing with the Securities and Exchange Commission, this definition is the same one employed in the NYSE's current rule regarding independent audit committees, which generally precludes a director from serving on a listed company's audit committee if the director has an immediate family member who is an executive officer at the listed company or any of its affiliates. Accordingly, the current NYSE listing standards use the term "immediately family member" in a much narrower context that is limited to employment as an executive officer with the listed company and its affiliates.
We believe that, when combined with the disqualifying relationships enumerated in the NYSE's proposed director independence standards, the definition of "immediate family member" is too broad and extends to relationships that do not present a threat to director independence. For example, as drafted, the proposed listing standards raise independence concerns where the director's brother or adult son marries a woman who is an executive officer of a firm that provides services to a subsidiary of the listed company, even if the sister-in-law or daughter-in-law has no involvement in that aspect of her firm's business. Similarly, the proposed listing standards could disqualify a director of a listed company from being considered independent where the director's grown son is a professional employee at an accounting firm that provided audit services to the listed company within the preceding five years, even though the accounting firm is no longer the independent auditor for the company and the son never worked on the listed company audit engagement. Consequently, the same family relationship would not affect the auditors' independence under the auditor independence rules.
Clarity as to the definition of external auditors would also be helpful. For example, many companies engage a primary external auditor for the listed company's consolidated financial statements, but other firms may be engaged as independent auditors for non-wholly owned subsidiaries or joint ventures.
In addition, the vast network of family members covered by the definition will pose compliance challenges for listed companies under the business relationship test in proposed NYSE Rule 303A(2)(b)(iv). Companies will need to monitor on an ongoing basis the employment of their directors' immediate family members and the revenues of their customers and suppliers to avoid exceeding the 2%/$1 million revenue thresholds in the proposed rule.
If the definition of "immediate family member" is not more narrowly tailored, we are concerned that the NYSE proposals could disqualify many directors from being considered independent because their family members are successful accounting professionals or executives in business corporations. Accordingly, we suggest that the definition of "immediate family member" in the final NYSE rules be consistent with the definition used in the Commission's rules implementing Section 301 of the Sarbanes-Oxley Act of 2002. Such a definition would capture those familial relationships that may truly raise independence concerns without disqualifying directors from being considered independent based on attenuated relationships.
We also suggest the final Rule 303A(2)(b)(ii) be limited to individuals who participated in the audit of the listed company. Please contact me if you have any questions regarding the above.