Spring 2002
Volume No. 1

• From the Chairman
• Post-Enron Rulemaking
• Guiding the board: a more influential role for the corporate secretary
• SEC Speech Summary: Chief Accountant Robert Herdman
• 2001 Board Meeting Dates Survey Results
• ISS Proxy Analyses to Include New Corporate Governance Quotient
• Technology Trends for 2002

FROM THE CHAIRMAN

Dear Fellow Member:

In recent months, the Society has been helping members address real-time and anticipated changes to the marketplace and regulatory environment. Through chapter meetings, conference calls, e-mails from Society President David W. Smith, and the resources of www.ascs.org, we've made useful information available to members. We hope you have found this information valuable.

As you probably know by now, the Society dedicated a section on ascs.org to Enron-related developments, for which we culled the most informative legal memoranda and other information. Access it from the main page of http://www.ascs.org, in the "What's New" section - click on "Enron-Related Matters" and provide your ASCS password when prompted.

To further knowledge-sharing among ASCS members, David and Society Director Bob Bassett held initial discussions with experts in Knowledge Management. Their efforts in this direction will help us store and more readily share what we know, our "collective wisdom."

The Society issued three new publications since the New Year: "Annual Meetings of Shareholders," "Corporate Minutes," and "Current Board Practices, Fourth Study." Each of these captures useful, practical information, and is available now.

And, in a very significant development for the Society, several publications can be paid for and downloaded online - among these are "Corporate Minutes," "Suggested Guidelines for Public Disclosure and Dealing with the Investment Community," and "Insider Trading Policies: A Representative Sampling." If you prefer a hard copy of any of these, that option is available to you. In the future, all of our publications will move to this dual format model.

On March 15, the Society's Securities Law Committee met with the Corporation Finance Staff of the Securities and Exchange Commission, and a candid, helpful discussion took place. David sent you an e-mail which included highlights of the meeting, and there is also a summary in this newsletter, along with news of the Commission's latest releases and preliminary ASCS/BRT survey results.

The Society's 56th National Conference, to be held July 10-14 in Toronto, Ontario, is fast approaching. Much of the business program and many of the breakout sessions are set. There will be a breakout session on "Audit Committee Issues for Corporate Secretaries - Expanding Our Role," and one on "Director and Officer Liability and Insurance - A New Landscape." In addition, we will pay a visit (in a manner of speaking) to the Depository Trust Corporation, and understand how it is moving into the 21st Century. And of course, we will be examining the consequences of the Enron situation - most notably in a panel exploring legislative, regulatory and governance responses.

I look forward to seeing you all at the National Conference in Toronto July 10-14. You have received David's e-mails and faxes about the program, but there will be more information to come, so watch your inboxes and reserve the dates and your rooms at the Westin Harbour Castle Hotel. The number for the hotel is 416-869-1600 (be sure to mention the Society when you call).

Finally, I am sad to note that Sidney Davis, Chairman of the Society from 1984 to 1985, passed away in October in Naples, Florida, after being ill with pancreatic cancer. Sidney and his wife had built a new home and were enjoying it when he was diagnosed with cancer on September 11. The Society extends its sympathies to Sidney's wife and their entire family.

Sincerely yours,

Carol J. Ward

Post-Enron Rulemaking

• 10Ks: From 90 to 60 calendar days
• 10Qs: From 45 to 30 calendar days
• 8Ks: Reports of transactions and loans with an aggregate value of $100,000 or more due within two business days

As Alan Beller, Director, Division of Corporation Finance, Securities and Exchange Commission (SEC), stated at the Securities Law Committee/SEC meeting in March, the proposed releases from the SEC are a first stage in a process intended to improve the timeliness of disclosure and its quality.

At that meeting in March, Mr. Beller was responsive when practical issues of timing came up in the discussion - committee members told Commission staff that not all companies are prepared to file 10-Ks, 8-Ks, and 10-Qs more quickly than they already do, and that "for companies that feel a squeeze, it will happen most in the review period." Mr. Beller, speaking for himself and not for the Commission, affirmed that careful review of these documents will be increasingly important, especially from the audit committee, and that he "appreciates the difficulty of scheduling." But he also suggested that it is a mindset issue - companies need to be able to get audit committees together as the need arises.

Preliminary results from the ASCS/Business Roundtable survey on the Commission proposals (distributed April 17) show that 24% of the 217 companies responding will not be able to meet the accelerated timetable for Forms 10Q and 10K, and 30% are not sure. Forty-seven percent say that they may have to close accounting systems early in order to accomplish it, and will also have to hire additional staff.

With regard to the acceleration of the disclosure of insider trading on Form 8K, 44% of companies state that they could meet a requirement to file within two days, while 27% say they could not, and 29% say that they could file some information but not all. Seventy percent of the companies responding say that they would need to implement additional systems, software or have staff trained in order to file within two days.

Other items from the Spring SEC meeting agenda

Working with the numbers

Mr. Beller and Commission staff said that performance information in financial reports can continue to serve a purpose as long as it is presented in context. Referring to Commission speeches that address the issue (Robert Herdman's is summarized in this newsletter), Mr. Beller said that a critical accounting policy should be one that is important to the company and, perhaps, subject to estimates and judgments. If, for example, numbers presented in a 10-K are derived from a range, investors should know.

Carol Stacey, Chief Accountant of the Division of Corporation Finance, stressed the importance of qualitative disclosure, and said that often liquidity is not discussed very well. In speaking of MD&A, Mr. Beller said that the Division will not try to lengthen this section, but improve it. Right now, "Too much is elevator music - this went up a little, this went down a little."

Note: At the time of this newsletter distribution, the SEC had made the public aware that it will propose a requirement for companies to include a separately-captioned section regarding the application of critical accounting policies in the MD&A section. Visit http://www.ascs.org within the next few days - there will be a link to the release and related information as soon as it becomes available.

Fortune 500 reviews

One of the last topics on the spring meeting agenda was the Commission's Fortune 500 review. Mr. Beller said that the Commission's review of Fortune 500 companies was "a priority." How to tell if your company is up for review? "Issuers will only know if a comment letter is completed."

Disclosure of audit-related services

Disclosure of fees for audit-related services continues to be a problem for some Society members. Given that the press picks up on the category of "Other," perhaps ignoring accompanying explanations, the question was asked - would the Commission consider an additional category for audit-related fees? The Commission staff urged meeting attendees to continue with explanatory disclosure as they have been doing, and Mr. Beller, Director of the Division of Corporation Finance, said "we're not much happier with what the press is saying than you are."

Guiding the board: a more influential role for the corporate secretary

At a recent NY Chapter Meeting, Rick Steinberg, U.S. Leader for Corporate Governance, PricewaterhouseCoopers, outlined eight clear areas of involvement for the post-Enron board:

• Corporate strategy and planning;
• Risk management;
• Values and ethics;
• Corporate performance;
• Major transactions;
• Management evaluation, compensation and succession;
• Communications and disclosure; and
• Board structure and operations.

In a follow-up conversation by phone, Mr. Steinberg stressed that the corporate secretary is in a very influential position and can play an important role in guiding management and the board, to focus on issues such as risk management, ethics, and financial reporting. To do this, the corporate secretary needs to provide the appropriate information and make sure there is enough time on the board's agenda to fully address the issues.

When asked about Mr. Steinberg's observation, Hank Barnette, Of Counsel at Skadden, Arps, Slate, Meagher, & Flom, agreed that there is a real opportunity for the corporate secretary to be instrumental in the company-wide corporate governance agenda, saying, "The state that we all want to get to is one in which each individual employee in the corporation has a personal accountability for governance, for complying with the law, with best practices."

In getting there, Mr. Barnette suggested that governance might be broken down into four parts:

• Governance education - legal requirements, best practices
• Governance procedures - establishing the right processes
• Governance oversight/review - ensuring compliance
• Governance investigation - independent views on how well the company is doing

Although a company-wide initiative must be led by the CEO, Mr. Barnette said, the corporate secretary is in a key position and can help all parties in the role they are to play.

SEC Speech Summary: Chief Accountant Robert Herdman

Robert Herdman, Chief Accountant of the Securities and Exchange Commission (SEC), spoke about the critical role of the audit committee at the Tulane Corporate Law Institute in March, focusing on a "short list" of tasks that each audit committee member should bear in mind:

• Control the Agenda
• Be Diligent
• Take the Time

In discussing ways in which to control the agenda, Mr. Herdman reminded the audience of 1999's Blue Ribbon Committee report, where it was said that external auditors should think of the audit committee as their client. He stressed, additionally, that the audit committee should retain, hire, and fire as necessary. This is an "overarching concept that must be acted on," Mr. Herdman said.

Audit committee members also need to be involved in discussions with management, and need to hear disagreements as they are debated and resolved - they should not let their collective conscience rest with the phrase "there were no reportable disagreements."

With regard to internal audit concerns, Mr. Herdman noted that "the importance of the audit committees' understanding of the company's internal control structure, and their assessment of internal audit's effectiveness, is crucial in ensuring this important link in the chain is solid."

Other, related issues are benchmarking ("now that audit fees are disclosed, it should be relatively easy to compare a company's fees with those of a comparable peer group"); evaluating the competence of management ("the audit committee should ask for and receive frank assessments of the competence of financial management"); and upholding corporate codes of conduct ("audit committees should be champions of corporate codes of conduct and should be wary of granting exceptions to these codes").

In order for an audit committee to be diligent, Mr. Herdman emphasized that audit committee members should be proactive, and discuss, understand, and question the company's Critical Accounting Policies.

"A diligent understanding of the financial presentation and underlying transaction will need to encompass an understanding of the swing factors in results, as well as risk identification and management. Focus on big issues, issues that make a difference."

Mr. Herdman also referred to and quoted Warren Buffet's three key questions for audit committees (answers to which, Mr. Buffett feels, should be addressed in the audit committee minutes):

1. If the auditor were solely responsible for preparation of the company's financial statements, would they have been prepared in any way different than the manner selected by management?
2. If the auditor were an investor, would he have received the information essential to a proper understanding of the company's financial performance during the reporting period?
3. Is the company following the same internal audit procedure that would be followed if the auditor were CEO?

In closing, Mr. Herdman emphasized Time - "Audit committee members must make the time, and take the time, to achieve an adequate understanding of what the company's financials represent, to have enough time to consult with outside counsel and experts if necessary, to ask the tough and incisive questions, and to obtain answers that make sense."

Click here for the full text of the speech.

ASCS 2001 Board Meeting Dates Survey Results

Of the 391 respondents, 34% of the companies have quarterly board meetings, 24% meet bimonthly, and 6% monthly. The remaining 36% follow a variety of meeting schedules.

The third week is the most popular week of the month for board meetings, at 23%. The remaining order of preference is the second week (17%), the fourth week (13%), the first week (7%), and the last week (4%).

The most favored day of the week for meetings is Wednesday, selected by 22% of the companies, followed by Thursday (21%), and Tuesday (20%). Monday and Friday are the least favored.

Forty-eight companies changed the number of times their board meets. Of those companies, 31 reduced the number of meetings, typically by one or two meetings. Seventeen companies increased the number of meetings held, scheduling up to six additional meetings per year.

"Who determines on what day the Board meets?" The results are as follows:

• Assistant Corporate Secretary presents dates for approval to the Board - 34%
• Various chief executives including board members present dates for approval - 25%
• Board members determine the meeting dates - 15%
• Chairman determines the meeting dates - 14%
• Meeting dates are determined by resolution - 8%
• Management suggests board meeting dates - 4%

A small group of companies indicated that their meeting dates are as set forth in their by-laws.

An ad hoc committee has been formed to discuss and examine ISS's Corporate Governance Quotient initiative, and at the end of its tenure, the committee will issue some advice for member companies on how to deal effectively with this change.Watch www.ascs.org for further news.

ISS Proxy Analyses to Include New Corporate Governance Quotient

By Jill E. Lyons
Senior Vice President, Research and Development
Institutional Shareholder Services

Over the past several years, shareholders have suffered billions of dollars in losses at some US companies where weak corporate governance practices encouraged waste, fraud and abuse. As a result, investors (large and small), market regulators and mainstream business groups (including the ASCS) stepped up pressure on boards to improve their governance practices. Many boards responded by boosting director independence and creating boardroom structures that hold management teams accountable. Sadly, some boards slept through the governance revolution. The absence of meaningful boardroom oversight at these laggards often leads to their market meltdowns.

Spurred by a growing stack of studies that show linkage between good governance and company/stock performance, investors no longer limit their use of corporate governance data to proxy voting and identifying targets for proxy season campaigns. Today, many investors view governance as an issue in making investment decisions as well.

This widespread view that "governance matters" necessitates the creation of metrics that allow investors to quickly and accurately identify the relative performance of companies. To meet this rising demand, Institutional Shareholder Services (ISS)-with input from a panel of advisory board members-spent the past two years developing a new tool for monitoring and comparing the corporate governance structures of America's leading publicly-traded companies.

When Will Ratings Be Issued?

In June 2002, a new CGQ^TM (shorthand for Corporate Governance Quotient^TM) rating will appear on the front page of each ISS proxy analysis. The rating will show how each company's corporate governance compares against an index and S&P's 23 industry groupings. A new table on the second page of each analysis will provide details about the key factors that drove the rating. ProxyMaster.com, ISS's electronic platform for delivering research to institutional investors, will allow users to screen portfolio companies on the basis of their CGQ^TM.

What Criteria are used to Generate Ratings?

The CGQ^TM rating comprises seven core topics: (1) board structure and composition, (2) charter and bylaw provisions, (3) laws of the state of incorporation, (4) executive and director compensation, (5) qualitative factors, including financial performance (6) D&O stock ownership, and (7) director education. (See Table 1 for a complete listing of the criteria reviewed.) In addition, some variables are analyzed in combination with other provisions. For example, a board with a majority of independent directors and all-independent key board panels (audit, nominating and compensation) receives a higher rating for each of these attributes than it would if it had either one of them in isolation.

ISS hopes CGQ^TM will foster progressive governance practices. Many governance experts advocate continuing education for board members, for example, but companies often have little reason to encourage (or pay for) such training. Going forward, directors who participate in "ISS-accredited" director education programs will boost the CGQ^TM scores for the boards where they serve. Accredited education programs include those offered by the National Association of Corporate Directors, the University of Wisconsin/State of Wisconsin Investment Board, the Wharton/SpencerStuart Directors' Institute, Dartmouth's Center for Corporate Governance, and the Stanford Directors' College.

How Can I Review My CGQ?

Disclosure documents (proxy statements, annual reports, prospectuses, etc.) supply most of the required data. ISS asks corporate secretaries to supplement these filings with additional input in order to create an accurate picture of each company's governance practices. A Corporate Issuer Review Process will afford company officials with an opportunity to verify the information collected before the score is calculated and included on the proxy analysis. This review process can be used to check for factual errors in the collected data or to supply additional data that isn't required in public disclosures. Companies interested in participating in this review process must provide ISS with the name, title, e-mail address and phone number of the corporate contact responsible for the review process. Each company will have three-business days for this review. To participate, sign up at our ratings website located at www.isscgq.com.

www.isscgq.com

The CGQ^TM web site includes information about the ratings, the criteria used to calculate CGQ^TM and a list of ISS "accredited" director education programs. This site will also allow issuers to supply additional information regarding the data points analyzed. Company supplied data will be compared to data in the ISS database to ensure the completeness and accuracy of our information. Users may also open an account that allows them to compare governance rating data for a self-selected peer group, and to learn how to improve their CGQ^TM.

To learn more about CGQ^TM, contact Jill Lyons 301-556-0403, or Mark Brockway at 301-556-0404.

Technology Trends for 2002

By Broc Romanek

Broc Romanek (broc.romanek@rrd.com) is Director of Marketing for RR Donnelley Financial, and Editor-in-Chief of RealCorporateLawyer.com. The views expressed in this article are the author's alone and do not necessarily represent the views of RR Donnelley Financial.

As could be expected with a market downturn, the acceleration of technological change has slowed from its breathtaking pace of the past five years. A number of promising technologies have fizzled out, as many entrepreneurs have been unable to secure financing. However, there still are a healthy number of new tech trends, as well as continuation of some old ones.

Below is a brief description of eight trends that may have lasting effects or may be fleeting fads, as only time will tell which ones have the requisite staying power.

1. Online Proxy Fights

During 2001, an increasing number of shareholder activists used Internet-based solicitation strategies as part of their proxy contests. The success of these strategies should ensure that these techniques will continue to be used. For example, Travis Street Partners LLC used the Net almost exclusively to elect three members to the board of directors of ICO. Similar results occurred at Pioneer Group, ICN Pharmaceuticals, Luby's and Goldfield Corporation.

Another recent example is the hotly contested Hewlett-Packard-Compaq Computer merger - in which a Hewlett family member who sits on the board opposed the merger - featured dueling Web sites: www.votenohpcompaq.com and www.votethehpway.com. The company responded with its own Web site within a week of the launch of Mr. Hewlett's site.

In most of these cases, the dissidents posted proxy contest developments on their Web sites and on message boards. Interactive discussions on message boards were used to allay any fears of would-be supporters. By encouraging Web site visitors or message board participants to provide email addresses, dissidents were able to compile a comprehensive list of potential supporters with whom they could easily and directly communicate. This enabled them to avoid the cumbersome process of demanding a stockholders list from management; a list that only consists of record holders - not "street name" holders.

2. Electronic Stockholders' Meetings

In April 2001, the first company took advantage of Delaware's year-old laws to conduct an all-electronic stockholders' meeting. Inforte became a groundbreaker when it allowed 5500 registered and beneficial holders to attend its e-annual meeting (however, no votes were cast electronically at the meeting nor were any questions e-mailed to management). Now states other than Delaware, such as Massachusetts, are reported to be considering changing their laws to allow e-meetings.

Despite Delaware's modernized laws, many practitioners had predicted that no companies would attempt a pure e-meeting because of the concerns raised by various groups, including the Council of Institutional Investors and the AFL-CIO. These groups seek to preserve the ability to directly confront management as they feel that there is no comparable substitute for in-person contact. It will be interesting to see if more established Delaware companies take their meetings online, particularly in view of the security precautions necessary in today's terrorist environment.

Notably, these groups do not take issue with supplemental Webcasts of annual meetings. During the past year, over 125 companies provided supplemental electronic access to their physical annual meetings. Since more stockholders likely would access an electronic meeting compared to attending a physical meeting, supplemental Webcasts arguably enhance the relevance of the meeting and arguably is required under Regulation FD if material nonpublic information is provided during the meeting.

3. "True" Electronic Offerings

Perhaps front running changes to be implemented by the SEC over the next year, on October 25th, the Commission itself declared a registration statement effective that relates to the first completely all-electronic offering, a variable annuity offering by The American Life Insurance Company of New York. Contrary to the SEC's existing interpretive guidance, American Life did not make paper copies available - nor did it provide separate notice to investors when a prospectus was posted on the Web.

Since several features of the offering were inconsistent with prior SEC positions regarding electronic delivery, the Commission issued its own order to declare the registration statement effective - rather than rely on delegated authority, a novel action without recent precedent. In addition, the Commission issued a statement that briefly explained its actions. Commissioner Hunt dissented, focusing on the lack of notice.

In its statement, the Commission took pains to note that its actions related to a unique situation - but it also signaled that its existing interpretive guidance on electronic delivery would be reconsidered to determine if it should be modified. It appears that one factor weighed by the Commission was that the novel aspects of the all-electronic offering were fully disclosed in the prospectus.

4. Electronic Delivery and Voting

During 2001, the high growth rate of electronic voting continued and online voting remarkably caught up to telephonic voting. Electronic delivery also grew but disappointed some as the number of companies soliciting consents actually decreased compared to 2000. This trend may reverse as householding should be implemented by companies in much larger numbers in the 2002 proxy season, allowing ample opportunity to solicit e-delivery consents. In addition, ADP-ICS recently began scanning disclosure documents to effect e-delivery for larger companies, even if the companies take no action themselves.

5. Not So "FreeEdgar"

As is the case for most free online ventures, free EDGAR services and other educational legal Web sites needed to find new ways to generate revenue. Popular Web sites such as FreeEdgar.com and 10Kwizard.com now charge subscription fees for access to their main databases. Other promising sites, such as Section16.net and TheCorporateCounsel.net are also subscription based.

Of course, existing sites continue to improve and provide more content, such as TheCorporateCounsel.net and Section16.net. And there still are sites with complimentary resources, such as RR Donnelley Financial's RealCorporateLawyer.com and TheCorporateLibrary.com.

6. Regulatory Changes and Communications

Under new Chairman Harvey Pitt, it appears that big changes in the regulatory framework may be forthcoming. Based on some of the Chairman's initial actions, it can be expected that new technologies will receive greater recognition in proposed rulemakings - such as the recent announcement that the SEC will propose that companies post their disclosure documents on their corporate web sites at the same time that they are filed.

In addition, the new Chairman likely will use the SEC's own Web site to communicate more directly with the SEC's constituency. For example, in late October, the SEC's Web site contained a new page on which the Corp Fin staff sought input regarding its comment process for filings. Input could be made on an anonymous basis and sent via e-mail to cfcommentprocess@sec.gov.

7. Director Communications

As cost, legal and security considerations are resolved, more companies are considering building or licensing extranets for their boards - as well as board committees - to communicate with management and each other. These can be custom built or taken off the shelf from vendors, like such as Corporation Service Company's Virtual BoardRoom (www.recordscenter.com) and BoardVantage (www.boardvantage.com).

Extranets enable directors to have more resources available at their fingertips and to better manage the increasing volumes of information in board packages. Companies are coming to grips with legal issues, such as a breach of the duty of care if it can be proven that a director did not bother to download and review the information provided in an online board book, or excessive casual language in online communications that could be used against the company in subsequent litigation.

8. Online Education

As the continuing legal education bodies of the state bars have caught up to the Web, online CLE has begun to take off during the past year. Some state bar associations claim that over 10% of their members have earned CLE credit online or through a CD-ROM. The ample convenience and low costs of online CLE is unparalleled and is likely to place considerable pressure on the traditional live programs that many lawyers have begrudgingly sat through over the years. According to the ABA Journal, of the 41 states that require CLE, 25 allow for some form of online CLE.

Since ISS' new numerical corporate governance rating system - the "Corporate Governance Quotient" (known as "CGQ") - takes into account director education, it will be interesting to see if continuing director education programs will emerge online. If they do, directors that become more accustomed to the Net are likely to ask for the convenience and wealth of board extranets.

Founded by Broc Romanek, RR Donnelley Financial's RealCorporateLawyer.com has been regularly hosting complimentary teleconferences on timely topics, the most recent regarding "Understanding the SEC's New Rule Proposals" featuring Peggy Foran, Ron Mueller and Alan Dye. Transcripts of these programs are available on the site - as well as hundreds of pages of FAQs about a variety of topics and a collection of law firm client memos. Also, the site is home to a monthly e-mail newsletter and hard-to-find SEC resources, like the SEC's Accounting Training Manual

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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