State Comptroller of New York
Jonathan G. Katz
February 18, 2003
RE: File No. S7-02-03 - Proposed Rule: Standards Relating To Listed Company Audit Committees Implementing Requirements As Added By Section 301 Of The Sarbanes-Oxley Act of 2002
Dear Secretary Katz:
As the State Comptroller of New York (an investor, shareholder, and sole trustee of the nation's second largest pension fund at approximately $100 billion in assets), I appreciate the opportunity to submit comments to the Commission regarding the standards relating to listed company audit committees. In light of the recent corporate scandals that have caused pension funds around the nation substantial losses, I cannot emphasize enough the importance of strengthening the regulations applicable to the securities industry. The standards promulgated by the Sarbanes-Oxley Act must be considered the floor, not the ceiling of the level of responsibility demanded from the industry, the Commission, and the judiciary system.
The audit committee requirements promoting independence and discouraging conflicts of interest in corporate governance are only the first steps in curtailing unfair dealings of management and board members. Enforcement of the rules is as essential as the rules themselves. Unenforceable rules are meaningless. Prohibiting noncompliant companies from listing their securities in the marketplace is real progress toward making SEC rules and the Sarbanes-Oxley legislation meaningful. I urge you, therefore, to expand the listing standards in areas where corporations have failed. The failure to keep members of boards independent and the resulting inappropriate influence on the auditing of internal policy and procedure have been major contributors to corporate corruption.
The New York Stock Exchange ("NYSE") submitted to the Commission its proposed stricter listing standards in August 2002. Along with several other capable advisors, my predecessor, H. Carl McCall, was a member of the New York Stock Exchange Corporate Accountability and Listing Standards Committee that proposed these listing standards. I hope that the Commission is sincere in its commitment to support Self Regulatory Organizations like the NYSE in their goals.
That being said, I urge you to continue finding ways to make certain that the independence of audit committees and boards alike is fully maintained. In addition to its other proposed listing standards, I support the requirements for audit committee and board independence that the NYSE has submitted and consider them a thoughtful and solid guide for the SEC. I am disappointed that the Commission has not yet moved on approving these standards recommended by the NYSE.
The NYSE describes an independent member of a board of directors as someone who does not have a "material relationship with the company". These material relationships may include instances where a member is also linked to and/or receiving indirect benefits from the company through consulting, banking, legal or accounting services, family relations, or charitable, commercial or industrial interests. Inappropriate influence particularly arising from relationships between board members who are audit committee members and management must be stringently monitored. I also must urge the Commission, therefore, not to allow its authority under the Exchange Act Section 10A(m)(3)(C) to weaken the independence requirements of audit committees by liberally granting exemptions. If members of a corporate board are to serve as audit committee members, it is not enough to disallow additional compensation for the dual role. Whether due to personal or alternative business connections, relationships between the board/audit committee members and management must be scrutinized. Approving committee members who have these relationships will taint the objective of ensuring an independent audit committee.
The SEC should clarify to whom the extension of the compensatory prohibition applies (i.e. allowing exceptions for family members employed by the company in non-executive, non-management positions with regard to a prohibition of compensation to a member's spouse and/or children). Within that clarification, the compensation prohibition blocking indirect compensation should also apply to entities, firms, or other companies in which the committee/board member has a significant business, financial or ownership interest.
With this process of creating independent audit committees the procedure and rationale by which the members were chosen and approved should be disclosed. If the board of directors itself (the very source of audit committee members) is making the determination of the independence of audit committee members, disclosure and publication of its reasoning is the only way to monitor whether or not due diligence was indeed performed in looking for conflicts of interest and inappropriate influences. This disclosure in an annual report to the SEC will be appreciated by investors and will not be unreasonably burdensome to companies.
In the spirit of promoting transparency and the restoration of investor confidence in the stock market, setting high and dependable standards is paramount.