isa U.S.A. and MasterCard International are greeting the spring weather by letting the sun shine in. Both card Associations took steps toward more transparency by appointing the first outside directors to their boards.

"This bodes well for our industry," said Robert Carr, President and Chief Executive Officer of Heartland Payment Systems Inc.

Following through with plans to reorganize its governance structure, on April 28, 2006, Visa named to its board: Philip D. DeFeo, managing partner of Lithos Capital Partners; Linda Baker Keene, a former executive with Gillette, Pillsbury and American Express Financial Advisors; Jon C. Madonna, former Chairman and CEO of KPMG; and John A. Swainson, President and CEO of CA Inc.

As members of a new Independent Directors Committee, these Visa newcomers will oversee management's recommendations on interchange rates and other core economic decisions.

Within days, MasterCard named six new directors to serve on the board after it becomes a public company, which requires a new governance structure. The company is preparing to go public as early as this month. Four more directors will be appointed within the year. Public shareholders will elect two of them, after the initial public offering (IPO). MasterCard's member banks will elect the other two.

MasterCard's move brings its board in line with shareholder expectations and Securities and Exchange Commission (SEC) regulations concerning public company governance.

Visa, however, officially has no plans to go public, while taking steps that appear to lead it in that direction. "Although we are a private organization, this is one of a number of steps Visa is taking to meet today's standard of good governance," stated Visa President and CEO John Philip Coghlan.

Diversity and transparency

MasterCard's new independent directors appear to give the board a broad range of international and sector experience.

Two directors work in telecom, one in pharmaceuticals consulting, one in the chemicals sector and two in asset management. Four of the six are non-U.S.-based executives. American directors include Mark Schwartz, former CEO of Soros Fund Management LLC, and David R. Carlucci, Chairman and CEO of IMS Health Inc.

Visa stated in its annual report that although the primary reason for its board reorganization was to add a broader range of experience at that level, "We also believe we are strengthening our position with respect to legal challenges that focus on our existing structure."

Visa, MasterCard and their member banks face a class-action suit by merchant groups alleging collusion in the setting of interchange fees. (See "Merchants seek structural changes to interchange in amended suit" in this issue of The Green Sheet.)

"Many of the legal and regulatory challenges we face are in part directed at our current ownership and governance structure," MasterCard stated in its SEC proxy filing. "We believe that a more open ownership and governance structure should leave us less prone to challenges and provide us with additional defenses." MasterCard will reduce perceived conflicts of interest by lowering member banks' equity stakes and transitioning to a board with a majority of independent directors.

Good news for ISOs?

Putting independent directors in charge of interchange will have an impact on ISOs, which may be good news. "It appears that the large annual increases in interchange are going to come to an end for the foreseeable future," Carr said.

"Merchants will become less focused on their increasing costs of card acceptance, and the increasing glare of the spotlight may someday subside. Certain ISOs will benefit from this, and others may lose depending upon their business model of handling increases in interchange."

A twist for MasterCard?

According to Carolyn Brancato, Director of the Conference Board's Governance Research Center, New York, N.Y., "Stock listing requires that compensation and audit committees be made up of independent directors."

Should MasterCard expect that by going public it is shielding itself from future lawsuits, it would probably be mistaken, since shareholders often sue. "Going public subjects you to more lawsuits because you are subject to disclosure," Brancato said. "If companies really wanted to keep a collusive atmosphere, they wouldn't go public."