Independent directors must make up the majority of the board of directors of every company listed on the NASDAQ Stock Exchange. In addition, each NASDAQ-listed company must have three committees made up of independent directors operating under a written and publicly available charter: a Compensation Committee; a Nominating Committee; and an Audit Committee.

Compensation Committee

NASDAQ Rule 4350(c)(3) provides that compensation for executive officers of a NASDAQ-listed company must be determined by the board of directors (made up of a majority of independent directors) or by a Compensation Committee made up of independent directors. If the Compensation Committee has at least three members, one member may be non-independent if the non-independent member does not have a family member who is an officer or employee of the listed company and if the member is not an employee or officer of the listed company. This exception to the requirement that each member of the Compensation Committee must be an independent director may not be used to allow service on the Compensation Committee of a non-independent director for more than two years.

The chief executive officer of the listed company may not be present during deliberations of the board of directors or of the Compensation Committee of the listed company when the board or the Committee are considering the compensation of the chief executive officer.

Nominating Committee

NASDAQ Rule 4350(c)(4) provides that each NASDAQ-listed company must have a Nominating Committee. The Committee is responsible for selecting members of the board of directors or nominating directors for selection by the full board.

There is an exception to the requirement that each member of the Nominating Committee must be an independent director. If there are least three members of the Committee, one member may be a non-independent director so long as that member is not a current employee or officer of the listed company or a family member of an employee or officer of the listed company. A non-independent member of the Nominating Committee may not remain on the Committee for more than two years.

Audit Committee

Under NASDAQ Rule 4350(d), NASDAQ-listed companies must have an Audit Committee made up of independent directors. A member of the Committee may not accept compensation from the listed company other than in the member's capacity as a director of the company or as a member of a committee of the board of directors of the company. Persons who took part in preparation of the listed company's financial statements during the prior three years are not considered independent directors for purposes of serving on the Audit Committee.

Independent directors who serve on the Audit Committee are expected to be capable of reading and comprehending financial statements. Also, one or more members of the Audit Committee should have sufficient prior experience in an accounting or other financial oversight position to develop "financial sophistication."

The Audit Committee is responsible for monitoring and reviewing the listed company's relationship with its independent auditor and monitoring and reviewing preparation and accuracy of the accounting and financial reports of the company. The Audit Committee also must establish and oversee a mechanism for receiving and acting upon complaints regarding any accounting or auditing matters affecting the listed company.

Copyright 2010 LexisNexis, a division of Reed Elsevier Inc.