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Restoring Faith in the
Markets
In
a letter this summer to the New York Stock Exchange, Domini Social
Investments outlined additional changes it feels are needed to restore
faith in the markets—changes that go beyond those the NYSE
has already proposed to its listing standards. Domini divided its
comments into two groups—first, those areas where it believes
the NYSE should provide further definition; and second, a group
of recommendations that address the broader issues that more deeply
affect investor confidence. Following are excerpts from the letter’s
recommendations. The complete text can be accessed at www.domini.com.
Items Requiring Further Definition
* Code of Business Conduct and Ethics:
A corporate code of conduct should go beyond
the current proposal to include principles of environmental and
social responsibility, as well as governance criteria. [It] should
also specifically outline the process by which boards and executives
will manage social and environmental risks. One way of providing
indicators for such management initiatives is required disclosure.
We recommend that the NYSE carefully evaluate the reporting requirements
of the Global Reporting Initiative (GRI). GRI provides a uniform
disclosure policy and extends the reach
of corporate social responsibility to economically, environmentally
and socially sustainable business practices.
* Definition of independence: We
encourage the NYSE to consider more specifically what constitutes
a “material relationship” to the company, and provide
more detailed guidance concerning the nature and duration of such
relationships. We also believe that a CEO who also serves as chair
of the board potentially compromises the independence of the board
and, therefore, support the separation of these positions.
* Board orientations and staffing:
As the NYSE proposal indicates, appropriate
minimum training for board and committee members is essential to
ensure that they are adequately prepared to provide proper oversight.
The impact of social and environmental issues on company performance,
liability and reputation should be included in board training that
familiarizes members with material considerations and thorough risk
management. The NYSE might also consider requiring corporations
to report on what training, if any, its board members have received,
from the corporation or outside sources.
* Audit and non-audit services: We
urge the NYSE to
establish guidelines to better define what audit and non-audit services
should comprise. Guidelines are needed that are quantitative, as
well as qualitative. We urge the NYSE to propose a logical percentage
threshold for audit versus non-audit fees.
Areas Not Covered by the NYSE Proposals
* Excessive executive compensation:
[This] is arguably the most critical single
barrier to re-establishing investor confidence in our markets. We
strongly encourage the NYSE to convene a taskforce to study this
issue in greater depth to determine the most effective ways to assure
that executive compensation is placed within reasonable limits.
We strongly support the banning of company loans to executives and
encourage the NYSE to adopt this position in discussions with the
SEC and Congress. We would also like to see the NYSE press the SEC
to bring greater scrutiny and regulation to the issue of executive
severance pay.
* Diversity: A
corporation’s commitment to ethnic and gender diversity is
critical to its long-term success in an increasingly diverse marketplace,
as well as to the corporate world’s reputation. We urge the
NYSE to recommend that corporations make greater efforts to include
women and minorities on their boards of directors and to regularly
report to shareholders on their progress in promoting women and
minorities to positions of authority.
* Board elections: We
recommend additional research into how boards can better represent
shareholders, and how investors can be presented with more options
for the slate of directors. We further strongly oppose classified
or staggered boards. The annual election of all directors is a necessary
part of maintaining accountability to shareholders.
* Improved social and environmental disclosure:
If U.S. companies are to compete globally,
they will eventually need to address transparently issues of corporate
social responsibility to meet [a] growing demand from European regulators
and investors. We strongly encourage the NYSE to consider requiring
all listed companies to disclose basic information about their social
and environmental performance. We recommend that the NYSE convene
a taskforce to study how standards may be developed that will compel
disclosure, in an aggregate manner, of material risks, liabilities
and impairments in these areas.
Among the other issues deserving of careful examination by the NYSE
are recommendations on how stock options are reported to stock owners
(we recommend they be expensed), whether in-person annual meetings
are an essential part of corporate democracy (we believe they are),
and whether boards of directors should consider questions of social
and environmental responsibility as matters requiring independent
oversight (we believe they should).
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