Number 1-99
Winter 1999

• Society expands focus in dialogue with SEC staff
• From the Chairman
• Milwaukee Chapter holds seventh annual seminar
• March seminar offers expanded technology update
• Society offers practical advice on audit committee
• Congress, SEC issue sweeping securities-related reforms
• Issues panel focuses on legal ethics and compliance
• The floor is open for nominations
• Make plans for 53rd National Conference, June 23-27
• Society studies board mandatory retirement policies
• ASCS membership update
• Commentary - Communicating with ISS before your annual meeting
• Interim report distribution survey results: It's 50/50
• Of Interest

Society expands focus in dialogue with SEC staff

For one of the few times in more than 20 years of annual December meetings between the Society's Securities Law Committee and staff of SEC's Division of Corporation Finance, neither group brought up Section 16 compliance or the shareholder proposal process. Instead, this year's dialogue focused on the two giant new SEC releases recently issued by the Commission - the "Aircraft Carrier" and "M&A" releases - and a variety of other topics related to corporate disclosure and filing. The meeting took place in Washington on December 4.

After Securities Law Committee Chairperson Margaret Foran and SEC Division Director Brian Lane handled introductions, ASCS member Thomas Witt opened by addressing the new M&A release (No. 33-7607, 34-40633). Witt noted that issuers are generally pleased with many of the proposals set forth in the release. "It's going to still take some tweaking, but it's a great leap forward," Witt said.

Witt focused primarily on the shareholder communication reforms proposed by the SEC in the release. These would relax restrictions on oral or written communications prior to the filing of the applicable registration, proxy or tender/exchange offer statement in connection with a proposed business combination (see article). Under current rules, companies involved in a merger or acquisition, can communicate with shareholders only via a mandated disclosure document, with limited exceptions. The proposed changes would permit free communications before the filing of a registration statement in stock mergers and stock tender offers; permit free communications before the filing of a proxy statement (whether or not a takeover transaction is involved); permit free communications about a planned tender offer without triggering the commencement of the offer; and continue to require that shareholders receive a mandated disclosure document before being able to vote or tender the securities.

SEC staff members said that they were particularly interested in the Society's views on easing communications with shareholders in general, whether or not a business combination is involved. Witt noted that the Committee would provide comments on communications and other issues discussed in the release in a letter it intended to file prior to the April 5, 1999 deadline.

Society member Edward Fleischman, a former SEC Commissioner, next addressed the "Aircraft Carrier" release (Nos. 33-7606, 34-40632) designed to modernize the regulatory structure under the Securities Act of 1933 with regard to securities registration and offerings. The release deals with reform of the registration system, communications sent out around the time of an offering, prospectus delivery requirements, periodic reporting under the Securities Exchange Act of 1934, and integration among private and public offerings.

Fleischman noted that the Society generally supports the proposed changes and applauds the efforts to blend technology into the process. He expressed a particular concern that Society members have with proposals that call for heightening the requirements for '34 Act reports while also accelerating the due dates for filing the reports. The SEC has proposed that officers and directors be required to sign '34 Act registration statements and periodic reports (including Forms 8-K and 6-K) to certify that they have read the reports and believe they contain no material misstatements or omissions. At the same time, the SEC solicited comments on whether to accelerate the due dates of Form 10-K to 60 days after fiscal year end and of Form 10-Q to 30 days after quarter end.

Foran then turned the discussion to EDGAR 2, the updated electronic filing system that the Commission hopes to unveil by May 1999 and to complete early next year. Under the new system, filings can be made in HTML language (the language used for Internet postings) rather than ASCII, though ASCII filings will still be acceptable. This will permit use of a variety of fonts, tables and graphics so that EDGAR documents can look more like the originals. The staff noted that a conversion process will still be involved in transposing documents into HTML, so the filings will still require careful proofreading. The Commission plans to put out a brochure describing key changes included in EDGAR 2, and will probably hold training sessions once the new system is up and running.

[The Society has offered its assistance in the training process, and an SEC staff member will discuss how companies can prepare for EDGAR 2 at the Society's upcoming Technology/Records Management seminar in Chicago, March 18-19. Another session is planned in conjunction with the National Conference at The Greenbrier in June.]

David Lewinter then noted the concern of many Society members about the extensive disclosure being required by the Commission of a corporation's Year 2000 readiness. "The guidance provided by the Commission has been helpful in developing disclosure, but the Y2K discussion has become the largest part of a Form 10-Q filing," Lewinter said. This creates an impression that the Y2K issue is the main one facing the company.

Martin Dunn of the SEC said that while companies' Y2K disclosure has gotten bigger, it hasn't necessarily become better. The staff is currently critiquing 10-Q filings and plans to put out additional guidance very soon. One possibility is for the Commission to put a sample disclosure document on its website. "But we don't want that to become new boilerplate," Dunn added.

Kathleen Gibson and Craig Nordlund next turned the discussion to the Commission's growing concern about how corporations manage earnings and the effectiveness of the Audit Committee (see article). Lane said this will be the SEC's number one focus in 1999, and companies can expect intense scrutiny in this area.

"The roles of auditors and analysts have changed in the last few years, making it more important than ever to keep earnings honest. The audit committee can play an important role, but it has to rely on management and the outside auditors unless the committee has no faith in the system," Lane said. "The audit committee's rolling up is sleeves is not going to be the way to solve reporting discrepancies. Their job is to make sure there is faith in the system."

Other topics brought up during the two-hour meeting included how companies deal with analysts, S-8 developments, and the future of householding for proxy materials.

Addressing the householding issue, former ASCS Chairman Stephen Norman noted that mail order companies and mutual funds already suppress thousands of duplicative mailings by householding. The technology is already in place, and companies could realize considerable savings by being able to household mailings of annual reports and proxy statements, Norman said.

Norman also expressed concern that the SEC's release on householding issued in November 1997 focused only on annual reports and not on proxy statements as well. "The system will only be effective if proxy statements are covered, too. The company can put a notice in the first package mailed out explaining how shareholders can request an additional packet," Norman said. He added that "implied consent" is another key element to make the system work effectively. If companies have to mail out a consent form, rather than have shareholders deny consent, they probably will not get a big enough return to get the system moving.

Betsy Murphy of the SEC said that householding is a big procedural issue. There is support within the staff for allowing householding of both annual reports and proxies, and they are currently drafting a proposing release on proxies that should be issued at the same time as final rules concerning annual reports. While Murphy announced no definitive timetable, there has been some speculation that the releases will be issued by mid-February.

FROM THE CHAIRMAN

Fellow Members:

When Kathy Gibson, our Corporate Practices Committee Chairperson, addressed the Blue Ribbon Committee looking into audit committee reform last month, she came armed with up-to-date information about the current practices of 550 different companies and the viewpoints of those companies' corporate secretaries concerning recommendations under consideration by the Committee. This information, obtained and tabulated in less than a week via an ASCS "Flash Fax" survey, gave her remarks added relevance and impact. The next day, a reporter from The Wall Street Journal noted the Society's presence at the session and cited statistics from the Society survey.

This is one of several instances in the past year in which the Society has conducted member surveys to respond to specific issues under consideration by the SEC, the business press, or one of our national committees. Because of our members' willingness to share data about their companies and their own job situations, the Society's surveys and published survey reports are well respected and widely distributed. For example, our Current Board Practices study has already become a standard in governance bibliographies. It's an area in which we have a unique capability.

Over the next few months, the National Office is going to distribute two major questionnaires - a new survey on Compensation of the Corporate Secretary and our third Current Board Practices study - as well as several flash fax surveys on subjects such as annual meeting and board meeting practices at your company. I hope you will take the time to complete the questionnaires. The higher our response rate the more useful and practical the data will be, and the more impact each study will have.

Our survey and testimony on audit committee reform are just the start of the Society's efforts in this area. Based on comments made by Brian Lane of the SEC at our meeting with the Commission staff in December, "earnings management" (which includes the audit committee project) is the SEC's number one priority as we enter 1999. It is important that corporate secretaries step to the front on this issue because of our special relationship with management and the board and our disclosure responsibilities. The ASCS Securities Law and Corporate Practices Committees are going to be closely following and offering suggestions on potential reforms in this area, and we welcome your comments and questions.

Another subject the Society has been following closely involves electronic distribution of proxy materials and electronic proxy voting. We held two teleconferences on those topics during the fall and plan a third following the proxy season. In case you missed either teleconference or want to review the topic, the National Office has posted recordings of the panels and supplementary materials right on our website. There is much more very useful information located on the website, which is updated regularly. For many members, the website has become one of the Society's most valuable resources, and we're even recording dozens of "hits" each month from around the world.

Of course, our members are our most important resource, and we are very proud of the Society's record-setting membership growth. I want to extend special congratulations to our National Membership Committee for their recruiting efforts and offer a hearty welcome to the new members who have joined the Society in the last few months. Many of you are listed in the ASCS Member Directory update that accompanies this newsletter. Your presence in the Society will make it an even stronger and more vibrant organization. I hope you will take advantage of the many resources and networking opportunities the Society offers.

Karl R. Barnickol

Milwaukee Chapter holds seventh annual seminar

On October 30, 1998, the Society's Milwaukee Chapter and financial printer Bowne of Milwaukee co-sponsored their seventh annual half-day corporate/securities seminar for 120 registrants. Lou Thompson, President and CEO of the National Investor Relations Institute, delivered a luncheon address entitled "Managing Earnings Expectations: Where Do We Go from Here?"

The luncheon was preceded by two panel presentations. Norrie Daroga of M&I Data Services, Ken Gabriel of KPMG Peat Marwick LLP, Ken Hallett of Quarles & Brady LLP and Peter Holtz of Wisconsin Electric Power Company discussed various Year 2000 issues and consequences.

The second panel, composed of Thompson, Bill Goodman of KPMG Peat Marwick LLP, Russell Mancuso of the SEC's Division of Corporation Finance and Patrick Quick of Foley & Lardner, addressed recent SEC developments and initiatives, including the SEC's "aircraft carrier" release; disclosures in connection with the Euro conversion, derivatives, segment reporting and other financial issues; and experience to date with the "plain English" disclosure requirements. As in previous years, the seminar qualified for 3.5 CLE credit hours in Wisconsin.

March seminar offers expanded technology update

When the Society presented its first "Automation" seminar in 1985, worldwide computer networks, electronic mail, Intranet systems, and imaging were still in the future, and very few members would have dreamed that terms such as Edgarizing, website, database, CD-ROM, and scanner would become part of their everyday work vocabulary.

Members' technology interests and needs have expanded significantly during the 1990s. That is why the Society's seventh automation-related seminar - set for March 18-19 in Chicago - has also been expanded into a two-day course which will focus primarily on technology matters during the first day and records management and e-mail issues on the second.

Day one topics will include technology assessment and planning, use of the Internet and Intranet by Corporate Secretary's offices, using groupware and other intercommunication tools, automating shareholder services (including electronic proxy distribution and voting), and preparing for the advent of EDGAR 2, the SEC's revamped electronic filing system. Day two topics will include legal and practical issues in managing electronic and paper records, e-mail management and retention, and document assembly and management.

ASCS Technology Committee members Howard Malovany of Wm. Wrigley Jr. Company and Frank Novak of Chicago Management Consulting Group, Inc. are co-chairmen for the seminar. They are being joined by an outstanding faculty of Corporate Secretaries, attorneys, technology consultants, SEC staffers, and records management experts, who will serve on panels or lead breakout sessions. Seminar participants will also have an opportunity to view exhibits of new technology products and services being offered by vendors represented at the seminar.

The seminar is being cosponsored by Bridgeway Software, Inc., developer of Secretariat and several other programs designed to facilitate record keeping by the Corporate Secretary's office or corporate legal department.

Brochures containing program and registration details for the seminar are currently being mailed out or can be accessed on the ASCS website at http://www.ascs.org. Members can even register on-line, if they choose.
For additional information, contact Harriet Chabrowe in the National Office at (212) 681-2009.

Society offers practical advice on audit committee

Early in the fall, SEC Chairman Arthur Levitt sounded a call for audit committee reform to help solve what he called the "game" of earnings management through the use of accounting "fibs, gimmicks, and sleights-of hand" by many corporate managers and auditors. Since that time, a new Blue Ribbon Committee, created by the New York Stock Exchange and the National Association of Securities Dealers, has begun work to develop a series of "best practices" to improve corporate audit committee effectiveness.

The ASCS has become an active participant in these ongoing discussions on audit committee reform, offering to provide a "real-world perspective" on the best practices under consideration by the Blue Ribbon Committee. Topics on which comments were invited included heightening independence standards for audit committee members, requiring that at least one committee member have a finance or accounting background, requiring that audit committees adopt charters, having audit committees review quarterly and yearly financial reports before they are filed with the SEC, and including an audit committee report in the company's proxy statement.

As part of its efforts, the Society recently surveyed public company members concerning the governance, structure and disclosure practices of their audit committees. Members representing more than 550 companies responded to the survey. Then Society Corporate Practices Committee Chairperson Kathleen Gibson delivered the viewpoints of many ASCS members at an open hearing conducted by the Blue Ribbon Committee in New York on December 9, citing as support the results of the ASCS survey.

Gibson noted that an effective audit committee should be independent of management, willing to ask tough questions of the company's internal and outside auditors, and be satisfied that the corporation has processes in place to assure that significant issues "bubble up" to the attention of the committee or the entire board. She added that the audit committee's role is primarily to provide oversight, rather than "hands-on" financial analysis, and its activities should complement the work of the auditors without duplicating those efforts.

In her testimony, Gibson offered the Society's support for:

• a recommendation that all members of the audit committee be independent from management, under an enhanced definition of independence that would exclude relatives of senior management and persons with "non-trivial" business relationships with the company. The company would decide whether a business relationship is trivial.
• a recommendation that at least one member of an audit committee have a financial background in a broad sense, provided by education and/or experience, without requiring the committee member to have an accounting background or be a certified public accountant. "In our view, it is neither practical nor wise for an audit committee member to ‘roll up his or her sleeves' and parse accounting entries. Having financial acumen, on the other hand, can be beneficial," Gibson stated.
• a recommendation that the audit committee have a charter that describes, in a general sense, the duties and responsibilities of the committee and its relationship with the company's internal and external auditors.
• recommendations for the audit committee to hold private meetings with the external auditors or with the internal auditors and to have the ability to hire outside advisors at its discretion. At the same time, the Society believes that the audit committee's effectiveness would not be enhanced by having it hire the outside auditor directly.
• a recommendation that the audit committee set its own agenda and priorities.

Gibson also expressed ASCS members' opposition to other proposed "best practices," such as:

• a requirement for an additional report in the proxy statement beyond the disclosure already provided concerning the general responsibility of the committee and biographical information regarding those nominated to serve on the audit committee.
• mandatory review of quarterly financial reports by the audit committee before they are filed with the SEC. "In our experience, the management of most companies reports to the full Board or the audit committee regarding financial results on a regular basis (monthly or bi-monthly), making mandatory review of the Form 10-Q by the audit committee a ‘make-work' process with marginal value," Gibson said.

A complete transcript of Gibson's remarks and final results of the Society survey on Audit Committee Effectiveness are posted in the "What's New!" area of the Society's Internet website at http://www.ascs.org. The Blue Ribbon Committee is expected to issue its recommendations in late January.

The Society's testimony received the strong support of the Association of Public Companies, an organization that represents many mid and small-cap companies listed on the NASDAQ Stock Market. APTC President Brian Borders sent a letter to ASCS President David Smith noting that "On the subject of new mandates for audit committees, the Association's views are succinctly stated in the ‘key points' summary at the conclusion of Ms. Gibson's testimony....I endorse them on behalf of the APTC."

Seminar panel provides proxy season preview

by Walter Gangl
Senior Corporate Counsel, Pfizer Inc.

The recent Issues Update program in New York not only provided a valuable "update" on a wide range of important issues, it also offered a look ahead to the 1999 proxy season that is now upon us. Two panels on the first day of the seminar focused on "Proxy Season Tips" and "Getting to Know and Understand Your Shareholders," and provided participants with a forecast of the types of shareholder activist issues and shareholder proposals they will be grappling with in the coming months.

Howard Sherman, President of Institutional Shareholder Services (ISS), and Ken Bertsch of the Investor Responsibility Research Center (IRRC) each spoke about the main issues that will garner shareholder attention in 1999. They were joined on the "Tips" panel by Robert Schifelitte of ADP and Richard Vancil of Direct Report Corporation, who focused on the impact that expanded electronic and telephonic voting may have on the 1999 season.

Sherman told attendees that their companies should be prepared for the "5 R's" that will be most resonant among the ranks of restless shareholder resolutions in 1999:

• Repricing of stock options;
• Rights plans;
• Repeal of Cracker Barrel that will probably lead to more employment-related proposals;
• Rebellion (more proxy fights); and
• Retaliation against compensation committee members of boards for unpopular actions on executive compensation.

Bertsch added that companies should expect "more and bigger proposals" in 1999 with public funds becoming increasingly involved in the process.

[Bolstering the impact of Sherman's first R is the recent decision by the SEC staff to deny a request from General DataComm Industries for no-action relief from a proposal from the State of Wisconsin Investment Board on grounds of "ordinary business." Repricing proposals had routinely been considered ordinary business in the past. William Morley at the SEC, quoted in Director's Alert newsletter, said the staff's new stand is the result of "vociferous public concern" over repricing. SWIB has targeted at least 15 companies with repricing proposals and is just one of several proponents focusing on the issue, objecting to lower-priced options as "giveaways" to executives who were at the helm when the price of the company's stock dropped.]

Repricing is a sensitive subject for investors and companies alike. Following stock market losses that many companies experienced in 1998, the companies recommended lowering the exercise price of executives' options to restore their value as "golden handcuffs." Shareholders, on the other hand, object to lower-priced options as "giveaways" to executives who were at the helm when the stock price was dropping.

Sherman and Bertsch discussed specific repricing situations and offered their suggestions on how to win shareholder support. They advised companies to extend the option vesting term, cut the number of options, and/or limit repricings to lower level executives. They also discussed the pros and cons of "premium-priced" options (tied to stock price appreciation in excess of market averages) which some shareholders are favoring. They concluded that a repricing done "thoughtfully" and subject to shareholder approval is likely to win shareholder support.

On the subject of rights plans ("poison pills"), Sherman and Bertsch observed that shareholder resolutions either to redeem pills or to submit these plans for shareholder approval continue to garner among the highest levels of support from shareholders. Sherman noted that ISS's voting guidelines recommend voting in favor of most anti-pill proposals, but the advisory group will support either a "TIDE" plan (Three-year Independent Director Evaluation plan, similar to one developed by Pfizer Inc. (see June 1997 newsletter)) or a "chewable" pill.

On the other hand, so-called "dead hand" and "no-hand" pills (which restrict redemption of the pill to the old board or forbid redemption for a certain period of time) are strongly opposed by shareholders. Bertsch correctly predicted the Delaware court's rejection of the "no-hands" pill, which occurred in December in a case involving Quickturn Design Systems, Inc., which was the target of a takeover attempt by Mentor Graphics Corporation.

Sherman and Bertsch also alerted seminar attendees to expect more binding by-law amendment proposals, especially from companies in which a precatory proposal had received a majority vote and no action was forthcoming from the board on the issue. Bertsch noted, however, that there probably won't be a massive number of binding proposals anytime soon, since proponents are not sure whether state law, particularly Delaware's, will allow such proposals. "They may have to go to court over it first," Bertsch said.

"Rebellion" in the form of proxy fights and "retaliation" by shareholders against directors for excessive executive compensation decisions were also seen on the horizon in 1999 and beyond. Bertsch said that TIAA-CREF's stunning 1998 ouster of the incumbent board at Furr's/Bishop's Inc., where it won 80 percent of the votes in a proxy fight, has put even greater clout behind their already-effective strategy of quiet negotiations. Every company that TIAA-CREF approaches in the future can be expected to have even greater respect for the institution's views.

Two institutional investors represented on the "Getting to Know and Understand Your Shareholders" panel later in the day, reemphasized some of the points made by Sherman and Bertsch. Donald Cassidy, who handles Fidelity Investments proxy voting, reflected on the retaliation issue by noting that Fidelity votes against directors it sees as forsaking shareholders' interests on matters such as poison pills. Cassidy said Fidelity typically follows up with a letter to the board explaining its position. In addition, Cassidy explained that Fidelity has been sending reminder letters to companies about its position on votes taken in 1998 to influence the companies' actions in 1999.

Speaking on the same panel with Cassidy, Beth Young of the AFL-CIO's Office of Investment addressed the growing importance of the executive compensation issue to her fund and other institutional investors. "We aren't compensation consultants," Young said, "but we focus our attention on the processes by which CEO compensation is determined and whether it lives up to its billing. The compensation committee is very important to us. We want to make sure that there really is arm's length bargaining in the process."

The AFL-CIO submitted one proposal on compensation committee independence in 1998 and plans to be even more active in the future. The group has also set up a special "Executive PayWatch" Internet website (www.paywatch.org) that Young says is heavily visited. Among other features of the website is an area in which an employee can type in his company name and salary and then receive a comparison to the salary of the CEO at his company and an indication of how long it would take the employee to earn what the CEO did the previous year.

The Society's National Office staff will be closely following developments during the 1999 proxy season. For information about annual meeting dates and locations, members can contact Olga Holmes at (212) 681-2011 or oholmes@governanceprofessionals.org. For information about shareholder proposals and proponents, contact Mercedes Rodriguez at (212) 681-2000.

Congress, SEC issue sweeping securities-related reforms

For corporate secretaries and securities attorneys, November 3, 1998 was certainly a day to circle on their calendars. On that same Tuesday, President Clinton signed into law the long-awaited Securities Litigation Uniform Standards Act of 1998, and the SEC issued two giant releases with proposals to reform rules governing securities offerings and business combination transactions. The two releases, totaling nearly 1,000 pages, have been dubbed "The Aircraft Carrier" and "The Escort Carrier."

The new "Uniform Standards Act" (Pub. Law 105-353) makes federal courts the exclusive venue for most securities class actions. In so doing, it is designed to prevent plaintiffs from filing suit in state court to evade the requirements of the Private Securities Litigation Reform Act of 1995. Dual federal and state court filings had become a standard tactic, particularly for clients of William Lerach in California, and had made many companies leery about the effectiveness of the 1995 Act's safe harbor for forward-looking statements. The new law should also prevent evasion of other key reforms of the 1995 Act, such as discovery stay, lead plaintiff and pleading standards provisions.

The new law bars from state courts class actions alleging fraud in connection with the purchase or sale of covered securities. A "class action" suit includes those brought on behalf of more than 50 persons and in which common questions predominate, or those brought by named parties seeking to recover damages on behalf of themselves and other similarly situated unnamed parties. "Covered securities" are defined as those which are traded on a national exchange as well as securities issued by privately registered investment companies. Excluded from the definition are privately-placed debt securities. The law will help defendants force all actions arising out of the same facts into one forum and thus avoid having to litigate in several state and federal courts at the same time. Thus, an individual investor who has sued under state law in a state court may find himself part of an involuntary "class" whose claim is preempted by federal law.

The Act does preserve state court jurisdiction over a variety of actions, including certain actions based on the law of the subject issuer's state of incorporation or actions brought by a state, a political subdivision or a state pension plan. State jurisdiction over actions to enforce a contract are also preserved. In addition, the Act excludes shareholder derivative actions from its definition of class action.

"Aircraft Carrier" is launched

Like the Uniform Standards Act, the SEC's imposing "Aircraft Carrier" release (Nos. 33-7606, 34-40632) has been anticipated for several years. Many of the proposals included in the release grew out of the work of the Advisory Committee on Capital Formation under the leadership of then SEC Commissioner Steven Wallman. Wall-man's group had originally envisioned recommending major changes in the offering process through a shift from transactional to company registration. The rulemaking release issued by the SEC on November 3 does not propose such a change but does contain a series of proposals that would:

• reform the current registration system to streamline and accelerate the process by which issuers can register public offerings with the SEC by eliminating five registration forms currently in use and replacing them with new Form A for small or unseasoned issuers, Form B for offerings by larger issuers that have at least one year's reporting history with the SEC, and Form C for business combination and exchange offers;
• lift restrictions on communications sent out around the time of an offering, including analysts' research reports, to encourage issuers to provide more information to potential investors;
• amend prospectus delivery requirements so that investors receive all necessary information before they make an investment decision ("file then sell" rather than the current process of "sell then file" );
• expand periodic reporting under the Securities Exchange Act of 1934 to cover more topics, including risk factor disclosure and additional material events, and to accelerate due dates for periodic report filings; and
• change rules integrating private and public offerings to permit easier conversion.

According to a client memo developed by the firm of Fried, Frank, Harris, Shriver & Jacobson, the SEC believes that the proposals "will make registered offerings less burdensome, reduce incentives to raise capital through Rule 144A offerings, remove the possibility of SEC review from the offering process for certain issuers (thereby permitting these issuers to access the capital markets in a more timely manner), increase communications with investors before pricing and eliminate uncertainties created by the integration rules.

"While many of the proposed rule changes may have the intended result, others may make securities transactions more burdensome for issuers. In addition, many proposals, if adopted, would increase the liability exposure of underwriters, issuers and issuers' executive officers and directors."

A direct link to the "Aircraft Carrier" release on the SEC Internet website has been set up in the "What's New!" area of the Society's website for members' convenience.

Reforms for M&A rules

In conjunction with the "Aircraft Carrier" release, the SEC issued a second major package of proposed revisions to the rules governing mergers and acquisitions and shareholder communications (Release Nos. 34-7607, 34-40633).

The proposed amendments would permit free communications before the filing of a registration statement in stock mergers and tender offers and before the filing of a proxy statement. Companies could also freely communicate in oral or written communications about a planned tender offer without triggering the commencement of the offer. These communications would continue to be subject to the antifraud rules and certain filing requirements, however. For example, written communications would still have to be filed on first use, so that all security holders would have access to them, and companies would still be required to deliver to securityholders a basic disclosure document regarding a business combination in advance of the time an investment decision. The SEC also proposes to repeal the current "five business day rule" applicable to cash tender offers to allow for public communications without triggering a filing requirement. The proposed rules would also eliminate the availability of confidential treatment for preliminary merger proxy statements since parties would no longer be restricted in their communications.

Comments on both SEC releases are due by April 5, 1999. Subcommittees of the Society's Securities Law Committee are currently working on ASCS comment letters on each release.

Many corporate law firms have done extensive analyses of the two new SEC releases, and members may want to consult these documents. Copies of several different client memos are available from the National Office by contacting Blanca Rosbach at (212) 681-2010 or brosbach@governanceprofessionals.org.

Issues panel focuses on legal ethics and compliance

By Walter Gangl

Many Corporate Secretaries are finding themselves increasingly involved in issues related to corporate ethics and legal compliance. In fact, ASCS members such as Rennie Atterbury at Caterpillar Inc. and Alice Brennan at Bristol-Myers Squibb Company have added corporate compliance oversight to their already full load of duties. Atterbury and Brennan discussed their ethics and compliance activities as part of a panel presentation at the ASCS Issues Update seminar in November. They were joined on the panel by Barton Whitman of D&E Communications, John Walker of Pitney Bowes Inc. and Alan Yuspeh of Columbia/HCA Healthcare Corporation.

Atterbury, who chaired the panel, opened by posing several challenging problems to the panel and audience. He asked how one might distinguish between a business courtesy and an inappropriate inducement, and explained Caterpillar's policy against employees accepting business gifts. He also opened the subject of how a Corporate Secretary should handle being asked to sign altered minutes - minutes from a meeting that did not occur, that the secretary did not attend, or that did not state events as they occurred.

Whitman then set out the legal framework for legal compliance programs. He contrasted the Delaware Court's 1997 decision in re Caremark which emphasized company directors' responsibility to determine that an adequate compliance program exists with the Allis Chalmers case and other prior caselaw which indicated that directors had no affirmative obligation to ferret out wrongdoing in their company. Whitman also analyzed the implications of the Federal Sentencing Guidelines and enforcement proceedings on compliance program implementation and enforcement.

The other panelists then focused on identifying the elements of a good legal compliance program and describing how those elements were implemented in their own companies. The four key elements discussed involve:

• Educating management and employees about legal requirements;
• Fostering communication channels between employees and the compliance officer about compliance concerns;
• Evaluating actual compliance and the program's effectiveness; and
• Enforcing compliance policies against employees who violate the law.

According to Yuspeh, who came to Columbia/HCA a year ago to help the company through current government investigations and avoid future difficulties, the process of educating managers and employees about the company's legal obligations is the first step of a compliance program. The education program should: help managers appreciate their supervisory obligations; help managers and employees understand statutory and regulatory requirements, and how to get help interpreting the law when needed; demonstrate management's leadership; provide employees tools to find legal and ethical solutions to problems they encounter; and convince employees that the company is serious about compliance.

Brennan noted that one key part of Bristol Myers' employee education efforts involves placing a framed copy of the company's "Pledge" of lawful business in every company conference room. Articles explaining the company's "Standards" of business conduct are also included in employee communications, and the Pledge and Standards are periodically distributed to and acknowledged by thousands of supervisory employees.

Pitney Bowes follows a somewhat different approach, according to Walker. Walker noted that his FBI background had helped him establish a new compliance program at Pitney Bowes. He explained how his group tailored its educational initiatives to the company's 32,000 worldwide employee audience with literature and videos. To keep the program vital, he explained that Pitney Bowes plans its educational efforts to be ongoing, multimedia and effective.

Focusing next on communication, the panelists noted the importance of open airways between employees and the company's compliance officer. This allows employees to raise concerns, report wrongdoing or simply obtain guidance. Some companies have "800" number hotlines and/or e-mail links to contact an ethics/compliance officer with questions or to report wrongdoing. Other companies use third parties to screen calls for relevance and provide callers with anonymity. Still other companies provide for employees to contact local ethics officers, their division counsel or the General Counsel's office with questions. Different companies find that different approaches work for them. "The goal is to find an effective means to solicit and address employee questions and surface potential compliance problems at an early stage," Yuspeh said.

Ongoing auditing of operations to evaluate actual compliance is also essential to a compliance program. Self-audits by operational units, periodic audits by the compliance office staff and even occasional external audits in appropriate situations are necessary to ensure that the compliance program is really working. This ongoing assessment of compliance will help measure improvement and indicate any weaknesses in the compliance program that may need to be changed.

Yuspeh noted that Columbia/HCA, in constructing its comprehensive new program, has established a new board committee on compliance, and he has recruited ethics officers in each of Columbia's 300+ hospitals. The local ethics officer brings expertise, oversight and accessibility down to day-to-day operations. The company is also using the Internet to distribute legal guidance to employees and employing local self-assessments, internal audit teams and selective reliance on external groups to measure its own compliance and benchmark the company against its competitors.

The final element discussed by the panel involves enforcement of company policies against employees who violate the law, which is often one of the most difficult, but essential, aspects of a compliance program. Atterbury said the issue becomes especially difficult when a company's top salespeople or senior managers skirt the law, and enforcement may hurt the company's bottom line. He added, however, that to receive credit under the Sentencing Guidelines and in the court of public opinion when bad news breaks, a company must follow a principled and consistent approach to sanctioning violators. "Enforcing compliance standards against star employees and managers is the single most effective way to convince all employees that the company is really serious about compliance," Atterbury said.

Whitman concluded the discussion with an observation on the importance of regularly documenting both the operations of a company's compliance program as well as its board's attention to and actions on compliance issues. Working with the compliance office, each Corporate Secretary should develop a schedule for presentations to the board that regularly briefs it on compliance issues and ensure that board meeting minutes document the board's oversight and actions in this critical area.

The floor is open for nominations

The Society's Executive Steering Committee requests members' help in identifying the best candidates for Chairman-Elect and for new positions on the ASCS board of directors. Candidates must be regular members in good standing and must hold the title of Secretary or Assistant Secretary. Chairman-Elect nominees must be current or former directors. Please forward recommendations to David Smith at the National Office (dsmith@governanceprofessionals.org) by mid-February.

Make plans for 53rd National Conference, June 23-27

New ideas in a setting filled with tradition - that's the recipe for the 53rd ASCS National Conference, which will be held at The Greenbrier in White Sulphur Springs, WV, June 23-27.

The theme of this year's conference is "New Century…New Challenges." Addressing some of those challenges will be Coca-Cola CEO Doug Ivester, who will deliver the Conference Opening Address on Thursday morning, June 25; SEC Commissioner Laura Unger and CorpFin Director Brian Lane, NYSE Chairman Richard Grasso, Nasdaq-Amex CEO Alfred Berkeley and a variety of panelists and breakout leaders from both inside and outside the Society membership. In addition, noted social historian and author David Halberstam will be the Annual Luncheon speaker.

The Society is also planning two pre-conference workshops. One will focus on preparing for the SEC's newly-revamped EDGAR system, dubbed "EDGAR 2." The other will provide hands-on experience with corporate ethical issues and should qualify for CLE ethics credits.

In addition to the full business program, members and their families can look forward to a social program that includes an informal family night outdoors on the Greenbrier grounds, golf and tennis tournaments, a Gala Dinner on Saturday night featuring a well-known entertainer, and a fully-supervised children's program.

A letter will go out to members in February with more details about the conference, hotel pre-registration information, and travel discount information. The complete registration packets will be mailed out in April. For more information on the conference, click onto the Society's Internet website or contact the National Office meeting planners, Suzanne Walker at at (212) 681-2008 or swalker@governanceprofessionals.org or Harriet Chabrowe (at 212) 681-2009.

Combine the grace and beauty of The Greenbrier, outstanding speakers such as Coca-Cola CEO Doug Ivester, SEC Commissioner Laura Unger and social historian David Halberstam, and an outstanding business and social program, and you have the ASCS' 53rd National Conference, set for June 23-27. Mark your calendar today and read more about the conference on our website.

Society studies board mandatory retirement policies

The Society's Current Board Practices survey, published early in 1998, revealed that more than 60 percent of companies have adopted some type of mandatory retirement age policy for both their non-employee and inside directors. The policies generally set forth a specific age for mandatory retirement, any exceptions, and any other special provisions, e.g., a requirement that outside directors are expected to resign following a substantial change in the occupation they held when they were elected to the board or that inside directors must leave the board upon retirement as an employee. While a majority of companies may have mandatory retirement policies in effect, not all actually set forth their policies in their proxy statements.

Blanca Rosbach, the Society's Administrator-Research and Information Services, has done a random sampling of 1998 company proxy statements for those that contain descriptions of their policies on mandatory retirement age or term limits for non-employee directors. Of several hundred proxies studied, Blanca located 42 policy descriptions, which reveal the following data:

• The maximum age for board service by non-employee directors ranges from 65 to 73.
• The most often cited mandatory retirement age for non-employee directors is 70 (21 of 42 companies studied), with 72 ranking second (14 companies);
• Only four of the companies studied publicized a term limit policy. Two companies limited service to four three-year terms or 12 years; the other two limited service to 15 years;
• One company had an unusual provision that called for directors elected before the age of 60 to retire at age 70, and directors elected after the age of 60 to retire by age 72;
• Another company has adopted a by-law provision that permits the board to reelect a director to additional one-year terms by a two-thirds vote of the board in circumstances deemed to be "of significant benefit to the company."

Members interested in obtaining a company-by-company summary of the mandatory retirement policies should contact Blanca at (212) 681-2010 or brosbach@governanceprofessionals.org. Studies such as this one are dependent on the Society's National Office having on hand as many company proxy statements and annual reports as possible. Members are asked to make sure their companies' investor relations departments put the National Office on their mailing list for proxy materials samples.

Commentary

Communicating with ISS before your annual meeting

by Jill Lyons

Ms. Lyons serves as Director of Research and Development at ISS and is the key contact for questions about ISS voting policies.

As your corporation prepares for its next annual meeting, you may want to add regular communications with Institutional Shareholder Services (ISS) to your "to-do" list. In 1999, ISS will analyze ballot items for nearly 9,000 U.S. meetings and provide our 500-plus institutional investor clients with vote recommendations. Contrary to popular belief, ISS's proxy voting guidelines call for the "case-by-case" analysis of most issues.

Given ISS's heavy workload, especially at the season's March-to-May peak, it is best to open the lines of communications early and to give our analysts the heads-up concerning any new or unusual issues that may appear on your company's ballot. Following is a suggested timetable for how your company can work most effectively with ISS:

Drafting Stage-The fate of most proxy proposals can be affected by careful drafting, and slight misunderstandings can cost your company voting support. To avoid such problems, you should make sure your understand shareholders' hot button concerns on each issue that is likely to show up on your ballot. Some large activist investors' voting policies are public; many others will provide them to issuers upon request.

In recent years, our Corporate Programs Division has sought to make ISS policies readily available to the issuer community. Each year, we respond to requests from hundreds of corporate secretaries for information about specific ISS policies on issues, ranging from stock plans to mergers and acquisitions. We use press releases and our website to broadcast changes in our policies. Summaries of ISS's recently revised voting policies for compensation and capital structure proposals, for example, are available at ISS's website (iss.cda.com). The ISS Proxy Voting Manual, which describes in detail all of ISS voting policies and the framework for making vote decisions on every issue brought to shareholders for approval, is available to corporations. (If you want more information or a subscription, call 301-545-4107.)

"When companies send their definitive proxy statement and 10K to ISS, they should include a cover letter that identifies a corporate contact, phone number and fax number, so ISS analysts may direct questions to the appropriate person."

If you need additional assistance or have specific questions about the application of ISS voting policies or trends in proposal design, you can contact me - Jill Lyons, ISS's Director, Research & Development - at 301-545-4172.

Filing/Mailing-As soon as your definitive Proxy Statement and 10K are available, you should send these documents (preferably, in an overnight package) to Yvonne Payne, ISS's Manager of U.S. Procurement, at 1455 Research Blvd., 4th fl., Rockville, MD 20850. You should include a cover letter that identifies a corporate contact, phone number and fax number so that ISS analysts may direct questions to the appropriate person.

Once ISS has received all of the pertinent documents, the meeting will be assigned to an analyst. The complexity of the subject matter, rather than the company's industry, will determine the assignment, so you can't assume the same analyst who prepared the previous season's report will do so again.

In addition, if you want to receive a copy of ISS's final Proxy Analysis, send a letter to Fawn Coleman, ISS's Manager of Client Services (same address as above), three-to-four weeks in advance of the meeting date.

ISS Draft Analysis-As a general policy, ISS requests face-to-face meetings with all parties involved in a proxy contest or a contested merger. The presence of complex and controversial issues also may lead ISS to seek a meeting with the company. Discussions on most other issues are typically handled via conference calls.

In addition, approximately 19 calendar days prior to the shareholders' meeting, companies in the S&P 500 index with non-routine proposals (issues other than uncontested director elections and auditor ratification) can expect to receive a draft proxy analysis from ISS. Typically, ISS schedules a two-day review of its draft document. (Requests for a longer comment-and-review period are granted on a time-permitting basis.)

Many other companies seek the opportunity to review draft ISS analyses. ISS makes every effort to accommodate these requests and considers them on a case-by-case basis.

For consideration on of a request for a review or extension, contact Karin Estes, Director, U.S. Research at 301-545-4476.

ISS Delivery Date-ISS's draft proxy analyses are reviewed for content by a senior staff member and for style by the editorial staff. Reports are then delivered to clients electronically.

ISS makes every effort to deliver a final analysis to its clients 17 calendar days before the annual meeting so that institutions have time to review the report, conduct additional research, or follow-up with questions prior to making a voting decision.

If additional information come to light following the release of our final report, you can contact the analyst who prepared the report. If the new information is seen as significant, ISS will issue an "Alert" to our clients.

Anytime-ISS invites corporate input on its voting policies. Past discussion with Society members have been instrumental in our efforts to refine and improve our approach to complex voting issues.

Finally, ISS also wants your suggestions on how we can do a better job of addressing your needs. If you want to share you thoughts, call Patrick McGurn, ISS's Director of Corporate Programs at 301-545-4509.

Interim report distribution survey results: It's 50/50

An increasing percentage of American companies are discontinuing distribution of interim financial reports and finding alternative ways to make the information available to shareholders. That's the overall finding of a recent Society survey on interim report distribution practices. More than 470 companies responded to the survey, the fourth conducted by the Society during the 1990s.

The four surveys show a clear trend - fewer companies are sending out interim reports than before. In the 1998 survey, for example, almost exactly half of the respondents indicated that their companies do not send out interims (235 yes vs. 239 no), and a large majority of those which do not distribute interims indicated that they had previously done so (180 of 239).

For many companies the decision to discontinue mailing out interim reports is a fairly recent one. More than one-third of all respondents said that their companies had changed their distribution policy in the past three years.

Earlier ASCS studies had also shown a steady decline in interim distribution, but there has been a significantly drop-off in the practice since the previous survey conducted in 1994. At that time, approximately 14 percent of respondents indicated they did not send out interim reports at all (see February 1995 newsletter). The number not distributing interims had been 11 percent according to a 1993 study, and only 3 percent in a survey conducted in 1991. (Of note is that more than twice as many companies are included in the current study as in 1994.)

One controversial issue that has surrounded the distribution of interim reports in recent years is whether they should be mailed out both to holders or record and those who hold in street name. In January 1994, the ASCS board had recommended that if companies distribute interim reports, they should, as a matter of fairness, send them to all holders. The New York Stock Exchange subsequently included the same recommendation in its Listed Company Manual, though neither the ASCS nor the NYSE took a stand on whether companies should send out interims at all. According to the current survey, the majority of those which continue to mail out interim reports do so to all holders. However, that percentage (58%) has decreased somewhat compared to the 1994 study. At that time, 68 percent of respondents noted that they include all holders in their mailing. Of 1998 respondents, 19 percent indicated that they send interims to record holders only, and 23 percent include record holders and some beneficial holders.

Sixty percent of those companies which mail out interims do so in all but the fourth quarter, with an additional 32 percent sending out interims for all calendar quarters, and nine percent mailing them out semi-annually.

Only a small percentage of companies responding to the ASCS survey (13%) ask shareholders if they want to receive interim report mailings. Instead, they offer a wide variety of other means for shareholders to obtain interim financial information. These include (in descending order of popularity) posting data on the company's Internet website for holders to access, establishing a mechanism for shareholders to request earnings releases by mail, establishing a fax list for earnings releases, sending out releases via electronic mail, and providing an 800-number shareholders can call to listen to a recorded discussion of quarterly financial data. In addition, approximately one-fifth of the respondent companies make it possible for shareholders to listen to analysts' conference calls or to read excerpts of the calls on the company's Internet website.

Companies have reported mixed results on the popularity of the different options for receiving interim financial data, and very few companies that have discontinued sending out interims have met with strong objections from their shareholders.

Members can contact Blanca Rosbach in the National Office at (212) 681-2010 or brosbach@governanceprofessionals.org for more information about the survey results or about companies' interim distribution practices. Documents related to interim report distribution can also be ordered directly online from the Reference Document section of the Members Only area of the ASCS website.

Of Interest

Companies agree to arbitrate Y2K suits

More than 15 major corporations have signed a commitment to try to avoid litigation for Year 2000 disputes. The companies have signed a pledge to negotiate all Y2K conflicts, and failing negotiation, to mediate them through alternative dispute resolution (ADR). At the same time, the ADR commitment does not restrict a signing company's legal rights or ability to initiate litigation, should that remedy ultimately be determined as necessary. The pledge was developed under the auspices of the CPR Institute for Dispute Resolution, a nonprofit alliance of 500 corporations, law firms and legal academics. Signatories as of December 1998 included Aetna, American Standard, Bank of America, CIGNA, Darden Restaurants, Eaton Corporation, General Mills, McDonald's, Philip Morris, PPG Industries, Siemens, Sony and TRW.

For more information, members should contact Peter Philips at the CPR Institute in New York at (212) 949-6490 or visit the organization's website at www.cpradr.org.

Fidelity establishes holdings information contact

Fidelity Management & Research Company has established an Investment & Advisor Communications office to answer requests for holding/disclosure information that Fidelity regularly receives. The new office will be responsible for gathering and analyzing FMR ownership information upon request from issuers, state and federal agencies, stock markets and the SEC. Questions about the new office should be directed to Fidelity Compliance Consultant Henry Mulloy at (617) 563-7973.

ISS revises voting policy for capital raising proposals

Institutional Shareholder Services has revised its proxy voting policy for analyzing capital structure proposals. The methodology revolves around two basic questions: "What is the cost of the capital request?" and "Is the request reasonable?" To answer the first question, ISS examines the number of shares available for issuance as a percentage of the total number of authorized shares after accounting for the requested increase. Shares reserved for legitimate business purposes (e.g., stock-based mergers, stock splits, dividends, conversions, and shareholder-approved stock-based incentive plans) are subtracted from the pool of shares available. To answer the second question, ISS classifies companies into one of 11 peer groups for which an allowable increase - the maximum permitted number of available shares as a percentage of authorized shares after accounting for the requested increase - has been determined. For common stock proposals, the allowable increase will be adjusted upward if a company has a history of using common shares for stock splits or if the cost of a company's stock-based incentive program falls within levels considered appropriate by ISS. If the available shares (post-increase) is above the allowable cap, an against vote is recommended to ISS' clients. If the available shares (post-increase) is below the allowable cap, a for vote is recommended. More information about the ISS policy has been posted in the "What's New!" area of the Society's website or members can contact Jill Lyons, ISS Director of Research and Development, at (301) 545-4172.

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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