Number 1-96
January 1996

• NYSE contemplates changes in proxy fee structure
• From the Chairman
• Society's March seminar goes "Beyond the Basics"
• Society Sets Its Sights On Seattle For 50th Conference
• Society Compensation Study Shows Salaries On the Rise
• Board Compensation Analyzed at Issues Seminar
• What They Said.... at the Issues Update
• Texaco Studies Proxy Solicitation and Meeting Trends
• Bogus Proxy Reimbursement Requests Still Plague Companies
• Society Notes
• Promotions and New Positions
• Using "Parallet Accounting" to measure CEO performance
• Be Aware of International Records Retention Requirements
• Recent Books of Note
• Fax Survey Facts - Director stock ownership

[The NYSE proposal is, in part, a response to a report prepared for the Exchange by an ad hoc committee composed of members of the Society and the Corporate Transfer Agents Association that criticized the fact that fees currently charged to issuers by brokers "are unrelated to costs actually incurred or services actually rendered" and which further noted that "fees charged to issuers by member organizations are in excess of fees that would be available in a competitive marketplace for the services rendered."]

According to a report recently prepared by the Exchange under the auspices of its Secretary James Buck, the new structure would reduce fees significantly for issuers with 40,000 or more beneficial holders, reduce costs somewhat for companies with 10,000 to 40,000 beneficial holders and increase costs only marginally for issuers with 10,000 or fewer beneficial holders. The new rules would also provide incentives for brokers and/or outside firms they use to assist them in proxy solicitation, distribution of materials and vote reporting to employ electronic proxy services, such as touch-tone voting and electronic vote reporting, that may further reduce costs by cutting back on postage and mailing charges. Still a third means of savings would be incentives built into the new fee structure for brokers to omit mailings to wrap account holders and to consolidate multiple mailings to the same investor or household.

The current regulations (NYSE Rules 451 and 465), last reviewed in 1986, call for issuers to pay brokers a distribution fee of $.60 or $.70 per set of proxy materials (the lower cost is for routine meetings); $.40 or $.60 for reminder proxy distribution; and $.20 for other shareholder communications, such as interim reports. These fees do not include postage or "out-of-pocket expenses," such as the cost of tabulating voting results (including return postage) and envelopes. Presently, these out-of-pocket expenses are not broken out in bills sent to issuers nor are brokers or their agents required to pass along any savings they may achieve through the use of more efficient business mailing methods.

Under the proposed plan, fees in all distribution categories would be lowered between 25 and 50 percent. For example, the fee for initial proxy distribution would be dropped to $.45 per set. However, nominees or their agents would be entitled to bill issuers a minimum proxy fee of $45 per nominee (not including postage and out-of-pocket expenses) if the nominee or its agent offers: (1) to all U.S. investors the ability to vote their shares through telephone voting; (2) to those U.S. investors with portfolios having a worth of $500 million or more the ability to vote their shares electronically; and (3) to issuers or their agents daily vote reporting after the initial vote and through the meeting date.

In addition, the Exchange plans to seeks comment on other proposals that would call on brokers to charge actual costs for out-of-pocket expenses - e.g., actual outgoing postage, outgoing envelopes and business-reply envelopes, custom printing of envelopes and ballots and sorting of mail requested by the issuer - and to bill business reply postage at the Business Reply Mailing Accounting System ("BRMAS") rate, currently $.34 for each item returned. Specific out-of-pocket costs may also be established for votes returned electronically and telephonically. (Currently issuers may be charged return postage fees, even if votes or voting forms are not returned by mail.)

The NYSE proposals respond effectively to many of the criticisms raised by the ad hoc committee of Society and CTAA members. However, two of the group's suggestions still need to be addressed, according to its members: (1) the need to establish mechanisms by which issuers and brokers can resolve fee disputes; and (2) a desire to see the Exchange develop long-term alternatives to price regulation by providing issuers more choice in the means they use to distribute materials to beneficial owners and more control over the costs of this distribution.

Once the new proxy fee structure proposals have been acted upon by the Exchange's Board, the Society will issue a bulletin discussing any rules changes and noting when they will become effective.

Elsewhere in this newsletter, you will find an article encouraging you to take part in the Society's upcoming National Conference in Seattle in June. As I'm sure you're aware, this year's National Conference will be our 50th. Conference Chairman Archie Bankston and his committee are putting together a solid business program that centers around the corporate secretary's key role inside the boardroom and focuses on new issues confronting the board and affecting the secretary's job as liaison between management, shareholders and directors. The conference will culminate with a celebration of the Society's history and its members throughout the past half-century. This is sure to be a special event you won't want to miss. Come join with colleagues and friends for a stimulating four days in June.

Although we are celebrating our 50th anniversary, the Society is not resting on its past achievements. One necessity for an organization like ours as it matures is to find ways continually to renew itself. At the Society's most recent board meeting in October, we began focusing on a series of strategic/tactical steps designed to help the Society increase membership, strengthen member involvement at the chapter level and focus more directly on its mission. Those steps include: developing new membership marketing techniques to attract a higher percentage of publicly-traded companies, establishing mentoring programs and informal "brown-bag" lunches to help new members become more involved in Society programs at the local level and experimenting with new methods of distributing information from the National Office to the membership at large. We also discussed the possibility of adding a "tag line" to our name to better define our purpose to those outside the Society, particularly potential members (e.g., "ASCS: An Organization of Corporate Governance Professionals"). The boardroom discussion was wide-ranging and lively. We hope to get a number of these steps underway in the upcoming months.

The past fall has been a busy time for the Society. I want to mention especially the success of our Issues Update seminar in New York in mid-November, which was very well attended. The program offered valuable ideas on issues ranging from corporate governance to cost savings in the Corporate Secretary's Office to the practicalities of director compensation. And to top it off, many members got their first opportunity to tour the Society's new headquarters at a reception held there following the first day's business session.

Finally, I want to thank all Society members who took part as presenters, planners and attendees at the many different Society local and national programs during the fall. I also want to wish each of you the best of years personally and professionally in 1996.

[A brochure containing full details about the seminar program along with registration and accommodations information will be mailed to members shortly. In the meantime, questions can be directed to Mike Goodman in the National Office at (212) 681-2013. For hotel reservations, contact the Fairmont directly at (504) 529-4704.]

Christopher Screen, Assistant Secretary of Entergy Corporation and President of the Society's New Orleans Chapter, is chairing the seminar. Along with his work in planning the seminar program, Screen has extended an offer of Southern hospitality from his chapter that will include "inside assistance" to dining in New Orleans.

Another highlight will be a luncheon address by former Society Chairman Judy Cion, who has spent parts of the past several years assisting newly privatized corporate communities in emerging nations in the former Soviet bloc and Romania to develop effective corporate governance procedures. Judy has learned new languages and customs, dined on exotic and not always appetizing local delicacies and received an on-the-job education in foreign legal and business issues.

by David Smith, Society President

When members and guests gather in Seattle for the Society's 50th National Conference, they will be taking part in an historic celebration, experiencing an outstanding business program, enjoying the ambiance of a spectacular city and perhaps beginning a special vacation adventure in the Pacific Northwest.

It all begins on June 26, 1996, when Securities and Exchange Commission Chairman Arthur Levitt offers remarks to open the National Conference and will continue through a gala 50th Anniversary celebration on the evening of June 29.

A well-rounded educational program will be only one part of this year's National Conference experience. The city of Seattle will also play a major role in this year's venture.

If you have never been to Seattle, let me assure you that it is a beautiful city with water views at every turn and bold mountain peaks piercing the horizon. The views from the Westin Hotel, the Conference headquarters, are spectacular. The hotel is comprised of two towers which stand taller than most of the Seattle skyline. The meeting rooms sit conveniently on the mezzanine between the towers.

I understand that the elevators were a problem when last the Society held its National Conference at this hotel. The five elevators in the North Tower have been modernized since then and computerized so they are now "smart." This upgrading and "brainpower" will be added to the elevators in the South Tower well before we arrive in June. Elevators aside, the public rooms and guest rooms have recently been redecorated and are very comfortable and attractive. Attention to detail is obvious, and every five-star amenity is evident in the sleeping rooms. One gets the sense that the decorator, at least for the guest rooms, is a Frank Lloyd Wright aficionado.

Several months ago, National Conference Committee Chairman Archie Bankston, Society Administrator of Meeting Services Suzanne Walker and I traveled out to Seattle to explore the city's sites and sights. We were joined by Heather Howard, Secretary of Boeing, our local expert on the National Conference Committee. We visited several locations for events such as the "Singles' Dinner," an off-site family event and the gala finale on Saturday night. Our dilemma will be to select the best places out of so many wonderful possibilities. We would visit a location and pronounce it "perfect," only to find another equally ideal spot on our next stop.

What struck us about Seattle, beyond its beauty (the city seems to have been painted with broad strokes of blue and green), were the possibilities for pre- and post-conference trips, either heading north to Canada or Alaska, south to Oregon and California or east to Idaho and Montana. If last year is any harbinger, we can expect many children and teens to join us in Seattle. Archie has decided to add a Teen Reception and Teen Room, complete with music, videos, games and snacks to help those kids 12 years and older to meet and enjoy each other's company. The well organized program we always have for younger children will again be available and manned by a planning group that has worked with us in the past.

As for the business program, it will center around the theme, "American Society of Corporate Secretaries: The First 50 Years in the Boardroom." Panels and speakers will focus on corporate governance issues and the special place that Secretaries have in corporate boardrooms. We won't ignore the "nuts and bolts" either, with breakouts and roundtables designed to help members work together on everyday issues. And, of course, there will be lots of opportunities to network with friends and colleagues.

The 50th Anniversary celebration will be topped off by the premiere showing of a commemorative video and distribution of a written history of our Society, both of which you won't want to miss. The celebration is being planned by Gerald Burger and the 50th Anniversary Committee he chairs. The committee members - Gerald, Archie Bankston, Judy Cion, Jack Goetsch, Dick Hays, Penn Holsenbeck and I - have been at work for nearly two years to make this Society milestone memorable indeed.

There will be much more news about the 50th National Conference and the 50th Anniversary celebration in the months ahead. In the meantime, plan your vacation around Seattle in 1996 - and around the dates June 26-30.

The 1995 compensation report has recently been published by the Society, and complimentary copies have been mailed to the more than 1,000 members who completed survey questionnaires last spring. Others can order the report for $95 per copy by completing the order form enclosed with this newsletter and returning it along with payment information to the National Office by mail or fax. The report can help members prepare staff budgets and also evaluate their own current compensation relative to others with similar responsibilities in companies similar in size, primary industry or geographic location.

The Society's compensation study, the only one designed specifically to report on salaries and bonuses of corporate secretaries and assistant secretaries, is also unique in its presentation of data primarily according to job description rather than job title. The statistics are then arranged into such categories as job title, primary industry, company size, staff size, budget responsibility and geographic location.

Here are a few highlights of the new study:

• Base salaries for all respondents rose, on average, 14.2 percent between April 1, 1992 and January 1, 1995 - the period covered by the current study. That compares to a 4.6% rise during the previous reporting period (April 1990 to April 1992) and 12.7% during the period between August 1988 and April 1990.
• Average base salary and total cash compensation packages for 506 corporate secretaries with legal degrees who returned questionnaires were $157,700 and $214,900; for 255 secretaries without law degrees were $104,500 and $131,600; for 95 assistant secretaries with law degrees were $116,500 and $145,100; and for 131 assistant secretaries without law degrees were $65,700 and $72,000. Overall, 31% of respondents had base salaries of $150,000 or higher. In 1992, only 21% indicated earnings at that level.
• Average bonuses were $49,800, or 37% of base salary. That was up from the 29% noted in the 1992 survey. The average bonus for respondents with the title of secretary was 40% of base salary. while for those with the title assistant secretary, it was 23%.
• Respondents from energy and finance-related corporations indicated the highest percentage increases in both average base salary and total cash compensation since the 1992 study. On the other hand, compensation growth decelerated for respondents in the retail/wholesale sector.
• Base salaries for respondents in Southeastern companies increased more than five times as quickly in the 1992-95 period as 1990 and 1992. Other areas showing strong growth were the Pacific coast and western regions. Smaller increases were noted among respondents from the New York metropolitan area and the Middle Atlantic region.
• Respondents from all but one job description grouping had higher percentage growth in salary between 1992-95 than between 1990-92. That group included primarily secretaries and assistant secretaries whose jobs did not include legal responsibilities.

For more information about survey results, or to request a customized report based on specified parameters, members should contact Blanca Rosbach or Michael Goodman in the National Office.

One of the key areas under focus at the Society's recent Issues Update seminar was board compensation. Both a morning panel discussion and an afternoon breakout session were devoted to analyzing such issues as how directors are currently paid, what "Best Practices" companies should consider adopting, what current compensation methods are under attack and why, and what changes in compensation disclosure may be required under proposed new SEC regulations. The breakout session also focused on practical suggestions for disclosing executive and director compensation in company proxy statements.

The morning panel, entitled "How to Pay Your Directors: New Ideas and Issues," featured compensation consultant Beverly Aisenbrey of Frederic W. Cook & Co., Inc. and Society members Edward Fleischman, a former SEC Commissioner now with the New York firm of Linklaters & Paines, and Carol J. Ward of CIGNA Corporation. Carol Hayes of The Coca-Cola Company served as moderator.

Fleischman, a member of the NACD Blue Ribbon Commission on Director Compensation, reviewed the report issued by the group in October 1995. The NACD Report has gotten wide coverage from the business press and in shareholder activist publications, and the recommendations it contains are being carefully studied by the SEC.

The Report presents "Five Principles" which the commission felt should form the basis for setting director compensation and, based on those principles, recommends six "Best Practices" for companies to follow. One key principle Fleischman noted is that director compensation should be aligned with the long-term interests of shareholders through delivering pay in the form of stock. The Report asserts that "benefit programs, which often reward longevity rather than performance, may actually create disincentives for directors to act in shareholders' best interests." This principle led the NACD commission to formulate a "best practice" that directors should be paid solely in the form of equity and cash, with equity representing a substantial portion, and that benefit programs should be dismantled. In what Fleischman acknowledged was a matter of debate among commission members, retirement programs were cited as being a "particularly insidious" threat to directors' independence. The Report suggests that they be abolished and replaced with programs that encourage stock ownership, such as deferred stock awards payable upon retirement or termination of service.

In part responding to Fleischman's remarks, Aisenbrey noted that most of the largest American companies are already including stock grants in their board compensation packages. She cited Conference Board statistics that show that 83% of the largest 250 companies provide some form of stock grants to directors. On the other hand, abolishing director retirement plans entirely isn't going to be an easy process, according to Aisenbrey. She indicated that nearly four-fifths of the largest manufacturing companies and two-thirds of the largest service companies currently provide pensions for directors, though she foresees a meaningful decrease in those numbers as a result of recent shareholder activism opposing such plans. (The Society's shareholder proposal study for the 1995 proxy season notes at least 38 proposals calling for abolishing retirement plans for outside directors.)

Ward provided insights into how to deal with proponents of shareholder proposals that oppose director pensions. She suggested that corporate secretaries discuss the Board's process in developing its director compensation program and explain how the pension plan is a carefully considered part of that program. She also described shareholder approval issues for directors' stock plans and the Section 16 implications of adopting them.

The afternoon breakout session was led by members Brian Henry of Eastman Chemical Company and Alan Rudnick of CSX Corporation. They focused primarily on the disclosure implications of a recent SEC proposal that would require disclosure of board compensation in tabular format. The proposal may not be adopted by the Commission in time for the 1996 proxy season, and the staff has indicated that even if approved, use of director compensation tables may be on a voluntary basis for the first year.

Henry and Rudnick also discussed disclosure of perquisites for corporate executives, cautioning that small favors could give rise to reportable items. They also noted that the staff would like to see information about consulting arrangements to directors placed near other director compensation disclosure, regardless of whether the arrangements are entered in consideration of service on the Board.

Mr. Klee, a corporate attorney in Connecticut, is a member of the Society's Securities Law Committee.

"Some shareholders (with a social agenda) feel that doing well means doing good. Some (with a governance agenda) feel that doing well means doing right. There is little data to show that either agenda has shown up in enhancing shareholder value in the traditional sense. But for these shareholders, the efforts have had their own value."

- John Hetherington, Westvaco Corporation

- John Hetherington, Westvaco Corporation

- Dr. Margaret Blair, Brookings Institution

- Dennis Block, Weil, Gotshal & Manges

- Jerry Powell, Compass Bancshares, Inc.

- SEC Commissioner Steven Wallman

- Brian Lane, SEC

- Brian Lane, SEC

Those are just some of the findings of a recent survey on proxy solicitation and annual meetings conducted by the Investor Relations & Shareholder Services department at Texaco Inc. The Texaco study provides some valuable insights for other companies developing procedures to follow during the upcoming proxy and annual meeting season.

The survey concentrated on three principal areas of concern to corporate secretaries: (1) distribution of proxy material and proxy solicitation; (2) proxy voting; and (3) the annual meeting of shareholders. Questionnaires were mailed out during the summer to Fortune 100 companies, and responses were received from 54 of these corporations, including five oil companies.

Texaco had conducted a similar survey in 1990, and many of the tables presented in the analysis of the 1995 survey present comparative information from the 1990 study.

Here are some specific findings:

Responding companies, on average, distribute proxy materials 44 days before their annual meeting date, with 60 days being the highest response and 30 the lowest. In all, 89% of the respondents indicated that they mail at least 40 days before the meeting, compared to 62% in 1990.

More than 80% of companies sent out their 1995 materials in a combined mailing, with 61% utilizing third-class mail for the annual report/proxy statement combination. This compares to 48% using combined mailing in 1990, and only 20% employing third-class mail for this process.

Fewer companies are mailing follow-up material to shareholders of record than did so in 1990.

Confidential voting is being practiced in a much higher percentage of companies currently than was the case in 1990 (83% compared to 59%), with 50% of companies requiring confidential voting either through their by-laws or by formal company policy.

Final drafts of proxy statements were presented to the printer an average of 54 days before the annual meeting.

Quorums were obtained an average of 10 days before the meeting, with a high of 40 days and a low of one. This compares to an average of eight days before the meeting in 1990. The 1995 survey respondents also noted that an average 9% of their institutional shares were voted within 24 hours of their annual meetings.

In 1995, 25% of respondents said their major focus in the proxy process was on achieving the highest share representation possible, while an additional 60% said they place some emphasis on reaching this goal. In 1990, 54% indicated that obtaining the highest share representation was their major focus, and 39% indicated that they place some emphasis on reaching this goal.

Fewer annual meetings were open to the general public in 1995 than in 1990 (19% vs. 28%). In addition, 56% of respondents indicated that their companies require admission tickets for attendance, compared to 44% in 1990. One-third of the companies that require tickets print shareholders' names and addresses on tickets.

More than 90% of companies permitted their employees to attend 1995 meetings, compared to 66% five years ago.

Nearly one-third of companies (31%) indicated that they rotate the site of their annual meetings each year, compared to 23% in 1990.

Describing the tone of their 1995 meetings, nearly three-quarters indicated that the gatherings were "routine," while 17% said they were "unusually upbeat," 7% said "contentious" and "4% noted "raucous" behavior.

A large majority of companies (81%) continue to serve some types of refreshments at their annual meetings, and many provide gifts or mementos, product samples or discount coupons for company products.

For more information about the survey or its results, members should contact Blanca Rosbach in the National Office at (212) 681-2010.

Regan refers to these lawbreakers as "bogus mailers," and he helped to get one of them arrested last summer.

Here's how the proxy swindle is commonly carried out: The bogus mailer requests proxy materials and/or quarterly reports directly from an issuer, then bills for forwarding the materials at greater than New York Stock Exchange approved rates while never actually doing the mailing. Or the mailer will not even request the materials but still send bills to companies requesting reimbursement for alleged mailings. The bills are generally small ($75 or less), and companies, believing that a service has actually been performed for them, usually pay up. Even if the companies determine that they have been swindled, they usually don't pursue the matter.

That is until June 1995, when Kevin Weakland, a New Jersey man who carried out this scam for several years under various company names, including U.S. Depository & Transfer Co. (USD & TC), DMC Service Corporation, KLM International Fiduciary and NFSD Capital, Inc., found himself under arrest for mail fraud. Weakland sent phony invoices each proxy season to hundreds of companies for relatively modest amounts, according to Regan. A number of those companies were Regan's clients, and he tipped postal inspectors to the scam. The inspectors followed Weakland's correspondence for three months through a trail of commercial mailing centers, Federal Express offices and suburban neighborhoods in New York, New Jersey and Pennsylvania. When he was arrested, he was in possession of numerous checks, deposit slips and newly-prepared invoices. Regan believes Weakland is the first bogus proxy mailer arrested for mail fraud.

The Society has been warning members about improper reimbursement requests for many years. In addition, Blanca Rosbach in the National Office maintains a list of organizations who have improperly billed companies for distributing corporate communications in the past. The listed organizations have usually come to the Society's attention through inquiries by members, and the National Office is very interested in hearing about other individuals or companies whose "The bills are generally small ($75 or less), and companies, believing that a service has actually been performed for them, usually pay up. Even if the companies determine that they have been swindled, they usually don't pursue the matter." communications or invoices members believe may be questionable. The National Office will then write to the billers and request proof that they are legitimate. If such proof is not provided, the Society will list the organizations on its Reimbursement Requests List. The Society's listing is available only to members through Blanca Rosbach at (212) 681-2010.

The document contains the following introduction: "The Society has long held the position that the cost of distributing corporate publications to individuals or organizations is a cost which should be borne by the issuer only where such material is distributed to shareholders of record or to beneficial owners of the particular issuer being billed. If such material is distributed to persons who are neither stockholders of record nor beneficial owners of stock of the issuer, such costs should be borne either by the distributing organization as part of the cost of servicing its clients or by the interested individuals or organizations themselves. The above policy is clearly in line with that expressed by the Securities and Exchange Commission in its Release No. 34-13455, dated April 21, 1977."

How can companies recognize a bogus mailer? Regan has a few tips. He suggests that companies beware of billers which:

• send requests for proxy materials on pre-printed postcards and ask for round amounts of pieces to be mailed. They usually claim that the requested material is "for distribution to the financial, professional and business community."
• provide only a post office box as a return address and no phone number on materials requests or invoices; and
• send pre-printed invoices that have very little typing and use a "plug" figure instead of the appropriate postage for the documents.

Regan's suggestion to companies on how to avoid being scammed is to send materials only to brokers and banks with depository positions the companies can confirm or to people and firms on the companies' own mailing lists.

The Society further suggests that companies limit to two or three the number of copies sent in response to requests from non-shareholders and alert other offices or departments within their own organizations to do the same; that they not respond to telephone requests for such material; and that they alert those responsible for paying invoices that payment for materials distribution should be approved only after referring to the Society's list and determining that the material was actually requested by the billing organization and that the number of copies indicated as being distributed does not exceed the number provided by the issuer.

Los Angeles Chapter officers for 1995-96 pose for a group portrait. Standing are Virginia Young (Assistant Secretary) and Ann Coons (Secretary); seated are Bob van Schoonenberg (President) and O. Jean Williams (Vice President). Not pictured is Treasurer Dennis Codon.

Alumni news - Part I

Nick Baldino does trust work, serves on the Arbitration Board of the New York Stock Exchange and is working with the US Olympic Committee.

Jerry Breslow serves as a consultant on corporate matters and has led discussions with groups of corporate secretaries on how to survive restructurings.

Nic Bruns is teaching MBA students, handles arbitrations for his home county court system, is a volunteer consultant with the Executive Service Corps and during winter months in Florida delivers Meals on Wheels.

Dick Gray is a news reporter for a radio station in Bethlehem, PA.

Phil O'Connell, Phil Meyers and Dick Hart are using some of their newfound free time for travel. Dick has indicated plans to motor to Seattle for the 50th National Conference in June.

Lu herself has been volunteering with the Executive Service Corps, finding that assisting nonprofit organizations is very rewarding. She's also providing valuable input to the Middle Atlantic Chapter's Advisory Board. She welcomes cards and letters from other alumni describing their current activities and promises to "go international" in her next column.

Eunice Vizcaino joins Society staff

Attend Issues Update - earn 8.5 hours of CLE credit

Sara Berman takes on new membership responsibilities

C. Wendell Bergere, now Vice President, General Counsel and Secretary with Altera Corporation, San Jose, CA

Edward J. Biggins, Jr., now Secretary, Public Service Enterprise Group Incorporated and Public Service Electric and Gas Company

Alice C. Brennan, now Vice President and Secretary with Bristol-Myers Squibb Company, New York, NY

Kevin M. Brennan, now Vice President with The Bank of New York, New York, NY

Wayne Bussell, now Senior Attorney with Ashland Coal, Inc., Lexington, KY

G.D. Caliendo, now Vice President, General Counsel and Secretary with Orange and Rockland Utilities, Inc., Pearl River, NY

Alfonso L. Carney, Jr., now Vice President and Associate General Counsel-Government Affairs, Philip Morris Companies Inc.

Adriana Guevara Chiocchi, now Associate General Counsel and Director of Legal, with Cadence Design Systems, Inc., San Jose, CA

Dana Cilmi, now Sales Consultant with R.R. Donnelley & Sons Company, San Francisco, CA

Lawrence E. Dennedy, now Senior Vice President with MacKenzie Partners, Inc., New York, NY

Janice A. Dobbs, now Secretary, Chesapeake Energy Corporation

Betty R. Fleshman, now Secretary, Potlatch Corporation

Keith M. Giger, now Treasurer, with MidAmerican Energy Company, Des Moines, IA

Kevin J. Hallagan, now Associate General Counsel and Assistant Secretary with Case Corporation, Racine, WI

Susan L. Harris, now Senior Vice President as well as Associate General Counsel and Secretary, SunAmerica Inc.

Marilyn I. Hauge, now Director- Corporate Compliance and Investor Relations with Fremont General Corporation, Santa Monica, CA

Dennis M. Hughes, now Assistant General Counsel as well as Assistant Secretary, Crum & Forster Insurance

James H. Johnson, now Shareholder with Jenkens & Gilchrist, Dallas, TX

Richard A. Kalaher, now Vice President as well as General Counsel and Secretary, American Standard Companies, Inc.

Luke R. Komarek, now Corporate Counsel with FSI International, Inc., Chaska, MN

Gregg M. Larson, now Assistant General Counsel, Minnesota Mining and Manufacturing Company

Cynthia J. Lenkiewicz, now Associate Counsel with Centre Resource Limited, New York, NY

Susan Levinsohn, now Marketing Director with KLS Professional Advisors Group, Inc. New York, NY

Geoffrey D. Lewis, now Vice President, General Counsel and Secretary with NACCO Materials Handling Group, Inc., Portland, OR

Robert S. McLean, now Associate with Robinson, Bradshaw & Hinson, P.A., Charlotte, NC

Lawrence K. Menter, now Senior Corporate Counsel as well as Assistant Secretary, The Home Depot, Inc.

Lee R.Mitau, now Executive Vice President, General Counsel and Secretary with First Bank System, Inc., Minneapolis, MN

John J. Moran, Jr., now Senior Counsel with National Steel Corporation, Mishawaka, IN

Kathleen L. Nemeth, now Senior Corporate Counsel with Key Tronic Corporation, Spokane, WA

Lorraine P. O'Hara, now Assistant Secretary and Compliance Manager with ABM Industries, Incorporated, San Francisco, CA

Mark G. Otts, now Special Counsel with Jones, Walker, Waechter, Poitevent, Carrere & Denegre, New Orleans, LA

Cathy R. Sams, now Senior Counsel with Minnesota Mining and Manufacturing Company, St. Paul, MN

Gloria Santona, now Vice President and Associate General Counsel as well as Assistant Secretary, McDonald's Corporation

Mark R. Sarlitto, now Senior Vice President as well as General Counsel and Secretary, Zurich Reinsurance Centre Holdings, Inc.

Diane K. Schumacher , now Senior Vice President and General Counsel as well as Secretary, Cooper Industries, Inc.

Allan D. Smirni, now Secretary as well as Vice President and General Counsel, Pyramid Technology Corporation

Roger P. Smith, now Secretary, Minnesota Mining and Manufacturing Company

Robert C. Swan, now Vice President and Secretary, Phelps Dodge Corporation

James L. Vandeberg, now Of Counsel with Graham & Dunn, Seattle, WA

James R. Van Horn, now General Counsel and Secretary with NUI Corporation, Bedminster, NJ

Barbara A .VenHorst, now Manager-Investor Relations with McDonald's Corporation, Oak Brook, IL

Mark E. Watson, III, now Senior Vice President as well as General Counsel and Secretary, Titan Holdings, Inc.

Shelby Yastrow, now Executive Vice President as well as General Counsel and Secretary, McDonald's Corporation

John B. Yorke, now Vice President, Corporate General Counsel and Secretary with Integon Corporation, Winston-Salem, NC

Ardis Young, now Senior Legal Assistant with Newmont Mining Corporation, Denver, CO

Using "Parallel Accounting" to measure CEO performance

Therefore linking executive compensation to earnings per share and/or stock price appreciation, instead of to the creating of new quality customers, can be hazardous to executive health. For example, in the single year of 1993, CEOs at IBM, American Express, General Motors, Apple, Borden, Scott Paper, Kodak, Westinghouse, Eli Lily, Sears, etc., were all "retired" for one reason and one reason only. For several years in a row and prior to their untimely "retirement," each of these CEOs was unable to create new customers fast enough to replace the customer base lost to the competition. Yet the compensation packages of these CEOs increased year after year prior to their "retirement" - despite Drucker's admonition that "you get paid for creating a customer."

Often external forces can and do impact share prices and earnings more sharply than anything the CEO had done to add value in the past year. For example, a CEO may decide to cut costs deeply, downsize, reorganize, restructure and at the same time increase selling prices. Usually this will cause both earnings and share prices to rise sharply on their own. On top of this, should the CEO simultaneously authorize a vigorous and continuous stock repurchase plan, executive compensation could shift from generous to lavish even while valuable consumer franchises erode.

A recent Wall Street Journal article entitled "Corporate Anorexia" suggests that this scenario is quite pervasive. The article argues that Corporate America has cut costs not to the bone but below the bone. As a result many companies today have lost their capabilities to pursue and achieve quality growth - some for ever again. For example, an analysis of Nielsen data suggests that 9 out of 10 new American products fail in the first year of commercialization for lack of innovative product development and innovative marketing.

Therefore, if Peter Drucker argues that you get paid for creating new customers and you get paid for successful innovation with new products, how can changes in EPS and P/E ratios be a meaningful measure of executive performance? Put differently, why should a CEO spend today to create new quality customers for tomorrow only to lose or possibly end up being "retired"?

The difficulty in using EPS and P/S ratios is simple. Traditional accounting treats every profit dollar generated on the P&L statement as equal profit dollars. This process is very democratic but not very useful. However, to evaluate and reward executive performance properly, companies should follow a parallel accounting plan which recognizes that different profit dollars offer different values which facilitate future growth and future customer creation, while other profit dollars can deter future quality growth. For example the quality of an incremental profit dollar generated through a three-day price promotion today is worth less to the future growth of a business than an incremental profit dollar which was generated from having created a new, loyal heavy-user customer.

The profit dollar coming from the simple price promotion can, if continued long enough, turn a proprietary consumer franchise into a commodity franchise retarding future growth. That price promotion profit dollar is, therefore, called an easy profit dollar. It can make the P&L statement of total profits look good. But easy profits can relax the pressure on CEOs to pursue and deliver those important new quality customers for tomorrow.

Most importantly, the current accounting system has allowed no room on its balance sheet for the company's most valuable asset - i.e., the value of the company's consumer franchises and how those values change each year. Yet few financial analysts today and even fewer board Compensation Committee members have ever tried to measure and evaluate just what each CEO has added to or subtracted from the quality of the consumer franchises each year. Therefore if the CEO is paid both to create new customers and to be the ombudsman for growing the quality of the consumer franchises, how come CEOs are never held accountable on why and how the values of consumer franchises change?

Parallel accounting will also tell the Compensation Committee just what proportion of the company's total profits in any year came from new successful products introduced in the past five years. Parallel accounting will objectively measure how many new products were successfully launched in the past five years, how many failed and by how much were profits reduced because of these high new product failure rates. Parallel accounting will supply data on just how many loyal heavy-user customers were added and lost, how many customers were shared and how many customers became habitual switchers over the past year.

As indicated earlier, when 9 out of 10 new products fail each year, only parallel accounting can objectively spell out whether or not the system of new product/profit trade off was appropriate each year. Incidentally, variations in the new product failure rate each year are but one surrogate measure of the innovation quotient of top management. Drucker says that CEOs are paid to innovate successfully. In contrast, cutting costs is a "no-brainer." They shouldn't have been so high in the first place.

These are just a few examples of how parallel accounting can first define and then objectively measure just what constitutes a quality profit dollar and an easy profit dollar. There are many additional definitions.

As changes in EPS and P/E ratios become less meaningful surrogates of true CEO added value, it will be inevitable for new systems of linking executive pay to executive performance to emerge.

Experimenting with parallel accounting concepts today will enable Compensation Committees to rehearse the future with no risk and with no embarrassment. For example, the Comp Committee members and the CEO sitting together could first determine what might constitute a quality profit dollar and what will constitute a quantity profit dollar. Then they could take all of the actual profits generated in 1994 and redivide them into two columns labeled "Quality" and "Quantity." The total of the two separate columns of 1994 profits would, when added together, equal the exact level of profits as reported on the 1994 P&L. Then using the same 1994 definitions of what constitutes a quality and quantity profit dollar, the Compensation Committee could then reconstruct all of the 1995 profit data into the two similar classifications.

This two-year pro forma comparison of 1995 and 1994 on quality and quantity profits generated could help provide corporate management and the Comp Committee with a new insight on what is and is not working in innovatively creating new customers - Drucker's definition of executive performance.

Experimenting internally with new ways to separate quality profits from easy profits can become an important capability for linking executive pay to executive performance, especially in 1996. Should 1996 experience both an economic recession and a severe stock market downturn, then what criteria would Compensation Committees use in 1996 to measure executive performance?

Internal experiments with parallel accounting today can represent one way for boards and their CEOs to rehearse the future and develop new ways objectively to measure executive performance and corporate worth before they will be demanded.

Be aware of international records retention requirements

A company looking to expand into foreign markets today needs not only legal and economic advice but also a fundamental understanding of the various provincial and state statutes and regulations regarding records retention and management. Relying on the company's external auditor for advice concerning retention requirements addresses only financial records, ignoring other critical functional data and documents of the organization.

Here are just a few examples: From concern over the world's depleting ozone layer to global environmental pressures, a plethora of regulations and reporting requirements have been promulgated by companies due to pressure from various international environmental groups. The freedom to travel has added to the number of expatriates working in companies throughout the world. As a result, tracking and reporting employee statistics and benefits worldwide is also a concern of expanding companies. The constant "trade wars" between countries impact the types of records retained for the movement of goods and services. All of these issues, plus increasing international legal actions, make it necessary for companies to adopt standards in the retention of information worldwide.

This is not an easy process. To determine appropriate guidelines in Europe, for example, the company must understand that some countries' regulations are based on the Napoleonic Code, while others' are based on English Common Law. Coupled with these two governing philosophies, some parts of Europe still have city-state rule which extends local authority and regulations concerning records. The top of the pyramid is the European Union, which provides standards in the retention of certain categories of records. Even if a country is a member of the EU, its regulations still may not conform exactly to some of the standards.

Similar layering and conflicting issues reside in the rest of the world as well. Governing business regulations often have their roots in laws adopted from colonial rulers during the 19th and early 20th centuries. Even more confusing are the governing requirements on conducting business and information and reporting requirements by emerging countries attempting to switch their economies to open and free markets. The various business and retention rules in these countries are changing almost daily. Constant monitoring of these changes is essential in order to protect company assets while ensuring compliance.

Yet there is still hope. Even with all of this confusion concerning regulatory compliance in order to qualify a company to do and maintain business in a foreign country, one common practice provides a means of ensuring that a company is meeting the minimum quality standards in document maintenance. This is ISO 9000 series standards. (ISO is the International Standards Organization that provides international guidelines for the production of quality goods and services. Several European countries require companies' manufacturing and recordkeeping processes to be ISO certified in order to conduct business within the country.) A company's charter, products and services will determine which of the ISO 9000 document preservation and organization sections apply. Even though only quality records are impacted, the definition and extent of ISO provisions concerning documents is up to each organization. Once that decision is made, then consistent definition of the records is needed worldwide, together with constant retention periods.

ISO compliance is not the sole responsibility of the company's Quality Assurance Manager. The Corporate Secretary and company officers must also play key roles in identifying and retaining information on a worldwide basis. Singularly adopting ISO document maintenance standards is a good beginning for a company but does not replace the need for constant research and awareness of regulatory guidelines which must be followed to conduct business internationally.

For the Corporate Secretary, in particular, there is a need to help the company establish retention schedules which codify the data, document and record retention requirements of the countries in which the company wishes to conduct business or sell products/services.

Corporate Takeover Defenses(Lists of takeover defenses and other corporate governance features adopted by 1,500 publicly held companies as of June 1995). IRRC, 1350 Connecticut Avenue, Suite 700, Washington, DC 20036-1701, Price: $495, Telephone: (202) 833-3555.

Directors Year Book 1995 (A comprehensive compilation of newly elected corporate directors, including details on 806 companies that added outside directors in 1994). Directors & Boards, 229 South 18th Street, Philadelphia, PA 19103, Price: $95, Telephone: (215) 790-7000.

Directors' and Officers' Liability (A manual to assist directors and officers concerned about their possible liabilities). SPT Special Technical Publishers, Inc., 267 West Esplanade, Suite 306, North Vancouver, B.C., Canada V7M1A5, Price: $275, Telephone: (604) 983-3434, Ext. 3037. (Discount of 10% offered to Society members.)

Issues in Investor Communications and Corporate Disclosure (This report includes reponses from a sampling of 119 publicly traded corporations as well as an analysis on issues affecting relationships between corporations, securities analysts and institutional investors). National Investor Relations Institute (NIRI), Telephone: (703)506-3570, Price: NIRI members $50; non-members $85.

Redefining Corporate Governance: 1995 U.S. Survey of Institutional Investors (A survey of views of institutional shareholders and fund managers on such governance issues as CEO evaluation and compensation, direct contact between investors and boards and proxy voting). Russell Reynolds Associates, Inc., 200 Park Avenue, New York, NY 10166, Telephone: (212) 351-2000. Copies are available from Sally Laroche.

22nd Annual Board of Directors Study (Based on a survey of more than 1,000 directors, plus an analysis of over 800 proxy statements). 1995, Korn/Ferry International, 237 Park Avenue, New York, NY 10017, Price: $100, Telephone: (212) 687-1834.

Respondents: 933
Have/Don't have stock ownership guidelines for directors: 175/753
Have guideline for multiple annual retainer: 43
Have a specific share amount requirement: 96
Do/Do not have director pension plan in place: 298/634
Company has terminated, amended or replaced a director pension plan: 51
Ways indicated for changing plans: more than 20

The Corporate Secretary is published throughout the year as a service to members of the Society of Corporate Secretaries and Governance Professionals. Articles or statements appearing herein do not constitute legal opinion, advice or judgment and should not be relied upon as such. Inquiries regarding information contained in this newsletter should be directed to Geoff Loftus, at (212) 681-2000 or by e-mail: gloftus@governanceprofessionals.org. Inquiries regarding membership or publication orders should be addressed to:

Membership               Publications
Deborah Fox              Olga Holmes
(212) 681-2014           (212) 681-2015

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