Heightened Independence Standards for Advisors Should Give Compensation Committees Pause for Thought After July 1, 2013

On July 1, 2013, the portion of the revised "listing standards" of the New York Stock Exchange (NYSE) and NASDAQ Stock Market (Nasdaq) related to the independence of advisors to compensation committees of listed companies becomes effective. Even though not directly required by the listing standards, the heightened authority and responsibility to retain independent consultants and advisors, in combination with additional points of consideration in determining the independence of advisors and the committee's increased responsibility for oversight, makes the subject of independent advisors an important consideration in formulating compensation and benefits for executives and directors.

Due to the focus of shareholders, the Securities and Exchange Commission (SEC) and the media on executive compensation of listed companies, compensation committee members should identify the extent to which current advisors are or are not "independent" according to the listing standards or when there is a conflict of interest or the appearance of a conflict. Determining independence is situational. Factors to consider may include the extent of other services provided by the advisor to, and the relative value of fees received from, the issuer. Consultants and legal advisors selected by the management team may not be viewed as "independent" in the context of management compensation and benefits. A legal advisor that serves the issuer in a significant ongoing role may not be viewed as independent in situations where the issuer's goals or those of its executive officers are at odds with those of its shareholders.

Circumstances and topics of compensation committee consideration that would likely mandate the use of independent advisors or legal consultants include executive or director compensation or benefits (especially where "say on pay vote" requirements are applicable), change in control severance benefits for executives and the compensation package for a new chief executive officer. Although the listing standards exclude broad-based benefits from the scope of independent review requirements, the existence of a non-qualified supplemental retirement benefit plan that is tied to a broad-based retirement plan may create the need to include the broad-based plan in the scope of the independent review.

There are many factors that committee members should consider and a range of approaches to take. The appropriate approach may depend on the size and industry of the issuer, or other circumstances that may necessitate a more or less cautious approach. The committee might consider utilizing the issuer's in-house counsel, who is generally exempt from the independence standards or the committee may determine to retain independent counsel to analyze the independence of current advisors, identify circumstances that call for a level of independent review and design appropriate corporate governance procedures.

For a detailed review of the revised listing standards that were issued in January 2013, see the BakerHostetler January 2013 executive alert, "SEC Approves NYSE and NASDAQ Listing Standards Addressing Dodd-Frank Act Requirements for Compensation Committees."