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What industry organizations place standards on corporate governance?
• Public securities exchanges have extensive governance requirements for companies listing securities for sale with the exchange. Perhaps the most known US exchanges are the New York Stock Exchange (“NYSE”) and NASDAQ Stock Market (“NASDAQ”). Common exchange provisions require:
⁃ Director Independence – Exchanges require that listed companies maintain director independence, which includes independence from management and financial relationships with the corporation;
⁃ Committees – Companies may be required to comply with strict committee requirements, such as appointment of specific committees with director independence and defined charters (such as governance committee, audit committee, compensation committee);
⁃ Equity Structure – Companies may be required to adhere to specified equity structures that limit the rights of various classes of shares;
⁃ Management Restrictions – Companies may be required to hold separate director meetings that exclude directors who are also managers; and
⁃ Public Disclosures – Companies may be required to comply with standards for public disclosure of information, including the manner and frequency of disclosure.
The regulatory authority of exchanges comes from the exchange’s ability to control which companies are listed on the exchange. Exchanges may reprimand, suspend, or bar companies from listing their shares for violations of exchange rules.
• Discussion: Why do you think securities exchanges are concerned with corporate governance matters? Can you explain how each of the above areas of regulation support this objective?
• Practice Question: What are the some of the primary governance requirements placed on corporations by industry organizations?