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 Summer/Fall 2002
FROM THE CHAIRMAN
I'm very pleased to be writing my first letter to you as your new ASCS Chairman.
It is truly an honor for me to be in a position to give a little something back
to the Society that always has been so generous in sharing its knowledge with
me. Like so many of you, whenever I'm facing a new challenge one of the first
places I turn is to the Society. And with the tidal wave of change sweeping
toward us in the form of Sarbanes-Oxley and new listing requirements at the
NYSE and Nasdaq, the Society's resources have never been more valuable to members. Speaking of the Society's website, www.ascs.org, I believe it is one of the most important tools in our communications repertoire. How it is used and how it works with other traditional ASCS initiatives, relates to what will be one of the main initiatives of my tenure as Chairman - knowledge management (KM). Broadly speaking, KM relates to the capture and dissemination of knowledge among members of an organization. It's not a new business term, but unlike some reengineering fads, we won't ever grow away from what it means. In order to succeed and learn from each other, we will need to refine and apply our collective knowledge on a daily basis. The KM initiative grows out of the work that Bob Bassett and others performed on the ad hoc committee on publications a couple of years ago. Our publications are one way in which our separate experiences are stored and shared for the benefit of others - the challenge is to learn about other means and employ them where possible. I know many of you feel that one of the most important benefits of ASCS membership is the ability to network with colleagues at conferences and at chapter meetings. This, you say, is where you can find out how one company handled a particular shareholder challenge, or how another company implemented a change in governance policy your board is considering. I think we have all found it enormously helpful to meet someone in person and be able to get a practical response to a quick question or two. To be able to turn that informal exchange into a process, very likely supported by technology, would be of great benefit to all Society members. To this end, our Technology Committee recently changed its name and focus to Knowledge Management. We have pretty much succeeded in absorbing technology into the secretary's office. Now we want to do the same with KM. I'm looking forward to learning from and working with all of you, beginning at some of the fall conferences. Please don't hesitate to contact me or the staff of the National Office with any comments and questions. Sincerely, Tom Sanger
Taking stock of your optionsAn issue that is quite current now is stock options - are they an expense and if so, how should they be valued and deducted from the income statement? As the Financial Accounting Standards Board (FASB) continues its work on the subject, ASCS will be tracking the topic and providing relevant information. Here is a summary of developments as of the end of August... In the past two months, the list of companies choosing to expense stock options has grown. On July 31, the Financial Accounting Standards Board (FASB) stated in a news release, "The FASB applauds those companies because recognizing compensation expense relating to the fair value of employee stock options granted is the preferable approach under current U.S. accounting standards." Under the preferred guidelines of FAS 123, options are expensed at fair value on the day of grant, and are expensed proportionately over the vesting period. The method of valuation remains an issue - some companies have said publicly that they want a better way to value stock options than the Black-Scholes method. Proctor & Gamble, for one, said in an analyst call that they "continue to have concerns about the use of the Black-Scholes model. This model was designed to value short-duration, exchange-traded options. Employee stock options, which have a longer term, are not transferable and are subject to forfeiture by the employee, and they are a very different financial instrument." Coca-Cola, one of the companies choosing to expense options, decided to value their options through two separate investment banks. In a telephone interview with Carol Hayes, Chief Counsel, Transactions and Securities and Assistant Secretary, and David Harris and Stephen Bailey, both Accounting Managers, ASCS learned that Coca-Cola feels that this method is the definition of fair value - a willing seller meeting a willing buyer. The check on the banks' valuation is that the banks run a risk that the issuer will ask them to act on the price they state. Has Coca-Cola set a precedent by inviting outside parties to value their stock? Since there is still so much discussion over whether options should be expensed at all, how valuation is achieved is secondary, according to Mike Coke, CFO of AMB Property Corporation, a company that also expenses options. "Primary is whether you feel that options are an expense." But assuming that this is agreed, and if and when a requirement is imposed, companies who take the initiative now may be accomplishing some important ground work. On August 14, the FASB stated that they may offer three possible transitions to companies who voluntarily adopt the preferred fair value guidelines of FAS 123:
Another part of the FASB's deliberation is that all companies may be required to disclose in the accounting policy note to quarterly financial statements, and in any period for which an income statement is presented:
According to a FASB staff member, several board members expressed a desire to remove impediments to a company's voluntary adoption of the preferred accounting method of Statement 123. Some companies and members of the analyst community had expressed concern to the FASB that the existing transition provisions in Statement 123 would result in a distortion in reported results during the phase-in period, so to offer other alternatives to companies who move disclosure up from the footnotes seemed a reasonable first step. The broader issues of whether companies should be required to expense stock options, and the possible differences in the forthcoming international standard on stock options, are questions that remain unanswered.
Directors Forum 2002The following is an excerpt from the "Director's Forum" panel at the National Conference in Toronto. The speakers' remarks have been shortened and edited for clarity and flow. Carol Ward: The next panel is the Director's Forum, and we're privileged to have three distinguished directors available to share their perspectives on current challenges. I'm particularly pleased that Peter Larson, who is the Chair of CIGNA's Corporate Governance Committee, could join us. Kathy Combs, who is Vice President, Deputy General Counsel and Corporate Secretary, Exelon Corporation, is going to serve as the panel's facilitator. Kathy Combs: Good morning. The Director's Forum is always one of the highlights of this conference for me - it's a wonderful opportunity to hear from directors with whom you're not as familiar. We have an extraordinarily qualified and distinguished panel today. Peter Larson is currently a director of the NYSE, and he was a member of the committee which made the proposals. He chairs CIGNA's Governance Committee, and is a former director of COMPAQ Computers, COTY, Inc. and JuriSearch Corporation. He is a former Chair and CEO of Brunswick Corporation, and was an executive officer and director of Johnson & Johnson. He will share with us the background of the NYSE proposals. Constance Horner is a Director of Pfizer and chairs its Governance Committee. She's also on the board and governance committees of Prudential Financial and Ingersoll-Rand. She's currently Guest Scholar in Governmental Studies at the Brookings Institution. She has served in two presidential administrations - the former President Bush and Ronald Reagan. Connie is going to elaborate on the Director Education requirement of the NYSE proposals. Hank Barnette is no stranger to the Society - he is a past Chairman, and we welcome him back as a speaker today. He is currently on the board of MetLife, and is Chair of West Virginia University Board of Governors. He is Of Counsel at Skadden, Arps, Slate, Meagher & Flom, and Chairman Emeritus at Bethlehem Steel. Join me in welcoming Peter Larson to begin our panel. Peter Larson: Thank you. Good morning to you all. I am very pleased to be a member of this panel. Before commenting on the specific recommendations of the NYSE, I want to make some observations about our process - first, 10 out of the 13 committee members are or have been corporate directors, so there was no lack of corporate experience or perspective in the deliberations that we accomplished. Second, our recommendations are market-driven, and directed to restoring confidence in the NYSE-listed companies who practice proper accounting and ethical conduct. Knowing that you've read the committee's recommendations in greater detail than we have time available today, I'm going to focus on a few key aspects, starting with that in my view, the recommendations seek three goals:
The committee judged that the only way we could empower the board to take the necessary steps to avoid the kind of failures that existed at Enron was to require that a clear majority of board be independent. This of course led to the issue of what we meant by an independent director. There, we recommended that a company's board assess the relationship, and in order to police the determination, the committee is requiring that the company disclose in its proxy statement the basis for the determination of independence. In other words, there will be an opportunity to make it clear that, if any business relationship does exist between a director and company, that the amount of business is not material, is not significant, and therefore should not affect the ability of the director to exercise independent judgment. In addition to requiring that the majority of the board be independent, the new rules will require that all of the members of the three principal committees - the audit, nominating/corporate governance, and compensation be made up of independent directors, and that each of the committees have a separate charter that is publicly available. We also recommended that the board of directors itself have corporate governance guidelines, that they be published, and that the company have a Code of Ethics which is available on the website and published in the annual report. As to the credibility and integrity of financial and strategic information, there are three key recommendations:
Finally, our recommendation for shareholder approval of equity compensation for option plans. This has been an extremely sensitive issue. As a practical matter, most of Fortune 500 already do. But based on the testimony that the committee heard, it remains a key issue with institutional investors contemplating purchase of your stock. By making shareholder approval a requirement, we believe we served our listed companies well. ------ Constance Horner: As a director of several companies, I've seen the work life of the corporate secretary up-close - seen some of its challenges, and I know from the size of this audience that those challenges are greater now than ever. I've had the benefit of very responsive and sophisticated help from Peggy Foran at Pfizer, Susan Blount at Prudential, Ron Heller at Ingersoll-Rand, Lisa Fries-Gardner at Foster Wheeler, and I have no reason to believe they are not absolutely typical of the kind of outstanding assistance a board receives from a corporate secretary. A good corporate board is enormously assisted by a strong secretary, and we are in a time when this is true in spades, and as a director, I would like to thank the ASCS for its terrific ongoing leadership, especially through its very good educational materials. You as corporate secretaries will be critical players in implementing the new NYSE listed standards at your companies. One of those is, as Peter just indicated, the necessity for greater board independence. Today I'd like to speak directly to the contribution director education makes to director independence, and I'd like to include some practical steps that the corporate secretary can take to strengthen director education and independence. You can have every structure in place to assure independence and still have directors hold back from forceful intervention in company decisions, because they are sometimes made timid by ignorance. Even at the highest levels, and perhaps especially at the highest levels, people sometimes follow the old adage "it's better to be thought a fool than to open your mouth and remove all doubt." There is no overstating the importance of informed decision making. There is no question in my mind that confidence based on knowledge and understanding will allow uncertainties to surface before decisions are made. The NYSE listing standards feature director education prominently and at length. The standards encourage all companies to establish orientation programs for new directors, geared to the particular needs of individual companies - not one size fits all, not something that serves the lowest common denominator. They recommend that these orientations familiarize new directors with a company's strategic plans, significant financial, accounting and risk management issues, its compliance programs, conflict policies and other controls, its principal officers, and its internal and independent auditors. The proposals further recommend that the Exchange and its foundation enhance their support for continuing education for directors and officers at universities such as Stanford. Directors may arrive well-prepared, but they need to be continually educated - they know it, even if they don't say it - and it's important that the companies who will help shape their education also know that. And finally, the proposals envision a NYSE Directors Institute which will give courses around the country in major cities, with the participation of directors themselves and with academic experts in corporate governance and organizations with relevant expertise, such as the ABA, BRT, ISS, IRRC, The Conference Board, NACD, and so on. Most importantly, implicit in the heightened requirements for financial and accounting literacy and experienced audit committee members is an expectation that they, more than any other directors, will continue to educate themselves rigorously in what will be an extremely dynamic set of requirements in statute, regulation, and the suasion of independent professional bodies. Some companies will need to create director education programs from scratch, others will need only to modify existing programs. Some may have been engaging in best practices all along and may need only to codify what they do. Wherever your company sits on this spectrum, there is a lot of help available. The ASCS manual has a very excellent selection on director orientation which I recommend if you haven't looked at it recently. You can obviously look at the director education programs in companies known for best practices in corporate governance. Peggy Foran, Pfizer's Corporate Secretary, is continuing the tradition of director education, established as part of Pfizer's development of the country's first corporate governance department in the early 90's. That program involves first of all immediate meetings with senior executives, especially with the CEO and CFO, trips to research facilities and manufacturing facilities, notebooks describing the company's practices, structure, personnel, and the process, as well as subsequent meetings with senior management to gain greater insight into the workings of the company. A few final thoughts of a practical nature: I would suggest that you not be hesitant to expect your directors to learn through formal processes. My experience is that if you build it, they will come, and they will be inordinately grateful for it, even if they cavil about scheduling. Build your program on multiple components: face-to-face meetings, plain English written materials (oftentimes, copies of memos written by company experts to other experts will not suffice because they use professional jargon), relevant external materials, analysts' reports. Visits to company facilities are useful. Make sure that directors are aware of industry trends, and also trends in investor thinking. Encourage director attendance in director schools - the corporate secretary should insist on highly tailored, sophisticated programs, so that directors are truly benefited from these experiences. ------- Hank Barnette: It's great to be back with the Society. My wife Joanne and I thank you for your hospitality and friendship, and having attended many conferences we also thank you for their consistent timeliness, professionalism, and substance. We are facing some serious challenges. Misconduct by a few individuals in companies has led to enforcement efforts to deal with the misconduct, and a lack of confidence in companies generally. A number of legislative and regulatory solutions are being offered to deal with the problem. The American system is working - the process is slow and time-consuming, expensive, litigious and uncertain, but the enforcers are enforcing, the market is punishing those who have offended and some who have not. But we simply cannot legislate integrity. You can't have a tax law compliance attitude toward corporate governance. We all pay the amount of taxes due and not a penny more and it won't work here. We need to achieve five basic goals - having employees and directors understand the regulations applicable to their conduct, having a very sound and well-understood code of conduct, having a conflicts of interest policy that is alive and enforced, and having a company value system that is based on individual accountability and responsibility, and finally, having a company that works in accordance with what I call the front page test, which is being prepared to have what you do every day appear on the front page of local papers. With that in mind, I've been asked to comment on specific questions regarding what the CEO expects of his or her board and what the board expects from them? And as I thought about it, faced with these difficult questions, I did what I often do and I started benchmarking. And I've done this with a number of friends who are CEOs and General Counsels, and corporate directors and secretaries, and so while the views here are my own, there is no question that I've been educated by those whom I've asked. And I'm just going to list these quickly... A board expects of a CEO
What a CEO expects from the board and committees of the board really is not that much different: integrity, good citizenship, leadership in corporate governance (including whether the ethical standards of the company are being met), self-evaluation, independence and oversight, the duty of care. Being informed, and really understanding the company. Advice and counsel - always being there, and offering advice sometimes when not requested. Support and loyalty - it's so important that a company speak with one voice. Attendance and availability: it's more important than ever that the corporate secretary know where those directors are - it's some intrusion on your personal life but I think it's very important. The Yogi Berra rule, as I sometimes call it - it's amazing what you can see if you look. Critical evaluation of the affairs and activities of the company and the board, and, finally, front page conduct.
ASCS/ICSA Global knowledge-sharing in TorontoThe presence of members of the various branches of the Institute of Chartered Secretaries and Administrators (ICSA) at the National Conference in Toronto was an opportunity for global knowledge-sharing. On July 10, a meeting took place among ICSA representatives, David W. Smith, and outgoing Chairman Carol Ward. The countries represented were the U.K., Australia, Canada, Hong Kong, and Malaysia. The ICSA is a federation of an accrediting institute. Chartered secretaries who hold the position of Company Secretary in Commonwealth countries take an exam before they are able to begin work, and the ICSA administers the exam and acts as a membership organization. Over the years, a relationship has developed between ASCS and several of the ICSA branches, especially the Canadian branch, but, as David Smith remarked at the National Conference meeting, the time is now especially ripe for further information sharing. As more and more companies do business in one another's countries, a knowledge of local laws and an understanding of global best practices is compulsory. At the meeting, some ICSA representatives spoke about the current business climate in their countries. In Australia, companies are doing more and more business with the US and are opening offices in the US - there is a need to fill in "knowledge gaps" to meet the needs of their members. In Hong Kong, there are more and more US head offices and subsidiaries, and in China, corporate governance is evolving along with the role of the company secretary. As in the US, the time seems right to highlight the company secretary's role. Carol Ward noted that for US-based ASCS members, an enhanced relationship with the ICSA would be helpful to understand 1) where companies can do business, 2) what the business climate is like, and 3) what should be known both legally and culturally. To further the relationship, David Smith suggested a schedule of quarterly conference calls, the first of which will be coming up on September 17, 2002. Russell Barnier, Vice President of ICSA Australia, offered some observations
on the conference, saying in an e-mail, "I am pleased to have had an opportunity
to meet with your Chairman and President and that members of ICSA divisions
also attended. The ultimate in corporate governance practices are not reserved
to any one country and there will always be practical variances to cover local
legal systems and other local conditions. Because of this, ideas sharing on
corporate governance practices and principles will be invaluable to all concerned,
in that a different perspective will always be of use - if not for comparison,
then for adoption." Polling the audience: Seventy-two percent of National Conference attendees polled consider themselves CGOs by defaultAfter a panel discussion at the National Conference in Toronto, attendees experienced one of the benefits of interactive technology. "Polling the audience," where attendees used hand-held devices to respond to questions from the moderator, was a popular exercise this year and will likely be used again, being definitely more accurate than the old "show of hands" standby. Among the results from the survey were:
National Conference photos - pictures from the conference
Society NewsSuzanne Walker elected Vice PresidentAt its organization meeting in Toronto on July 13, 2002, the Society's Board of Directors elected Suzanne Walker a Vice President, based on President David Smith's recommendation. At the same meeting, Sara Berman was re-elected a Senior Vice President, as the organization's key financial and administrative executive. In commenting on Suzanne's promotion, David stated, "This is recognition of Suzanne's important contributions to the Society's success, and that she will assume additional responsibilities in assisting chapters to function, when time is precious and members' responsibilities at their companies are dramatically increasing. Members have never needed more the services, knowledge-sharing and networking the Society provides." NASDAQ/AMEX joint committee formedTo better understand and assist members whose companies are listed on the NASDAQ or AMEX exchanges, a Society ad hoc committee has been formed to follow changes in these organizations, and to develop targeted products and services for these members. In the next newsletter, we will follow-up on the committee's progress and recommendations. Society comments promptly on all recently proposed rulesUnder the leadership of the Securities Law Committee, the Society has been visible in the comment letter process with the SEC and the NYSE. In the past three months, ASCS has submitted no less than five comment letters, all of which can be accessed through the "What's New" section of the ASCS website, http://www.ascs.org. Issues UpdateThe Society's 25th Issues Update seminar will focus on emerging best practices in the new regulatory environment. To be held at The Grand Hyatt hotel in New York City on Thursday, November 21, 2002, the program will feature the latest thinking on the new governance listing requirements, key executive certifications, audit committee structure and responsibilities, and the most significant sections of the Sarbanes-Oxley Act. Filing Form 4's electronically, keeping track of insider transactions, revising and drafting board committee charters and codes of conduct, new 8-K requirements, director orientation programs, and exactly what constitutes a loan to an executive officer or director will also be discussed. On November 22, most of the Society's committees will meet at The Grand Hyatt to discuss how they can best serve the membership through future programming, publications, and thoughtful commentary on current issues. It's not too early to make your hotel reservations. Call The Grand Hyatt at 212-883-1234 or 800-233-1234. The room rate is $285/night single or double. Please be sure to mention ASCS when making your reservations. The room block expires November 1.
Form 4 in 48 Hours - Practical TipsBy Pat O'Donnell, President, Bridgeway Software, Inc. At the ASCS 56th National Conference, the breakout session "Filing Your Form 4 Electronically in Two Days or Less - Anticipating Change" was very popular, second only in attendance to the panel session on the governance response to Enron. However, at the time, no one would have predicted that within three weeks the US Congress would pass joint legislation and President Bush would sign into law the Sarbanes-Oxley Act of 2002. So the big question now facing the 2,500 companies represented in ASCS is how to comply with the Act's 48-hour filing requirement for Form 4. To help answer that question, here are some key excerpts from the breakout session and some developments since the conference. RESEARCH A lot of companies will consider tapping into their financial printers and law firms for help making their filings more rapidly. The research consensus, however, is that making the filing will be the easy part; getting directors and officers to alert a company's reporting group to imminent transactions will be the hard part. TIPS PROCESS
TECHNOLOGY
The task at hand may seem daunting, but with an effective blend of processes and technology, publicly traded companies can confidently accelerate their insider reporting. [Bridgeway Software's website is located at www.bridge-way.com]
Ensuring Ethical Effectiveness: Practical Steps for Boards Of DirectorsBy Steve Priest, Ethical Leadership Group, and Jeff Kaplan, Arkin Kaplan & Cohen, LLP Recent events have underscored in a powerful way just how much a company stands to lose if its reputation for ethical and law abiding conduct is called into question. In a sense, preserving this invaluable asset has always been a duty of corporate directors. But the consequences - to shareholders and directors themselves - of board inattention to these issues are now far greater than ever before. The "modern era" of greater accountability for directors in the area of ethics and compliance began not with Enron but with the Delaware Court of Chancery's 1996 opinion in In re Caremark Int'l Inc. Derivative Litigation, which effectively overruled prior law to hold that the fiduciary duty of care requires compliance-related oversight. Under Caremark, breach of this duty can occasion personal liability for directors to shareholders in cases of economic loss (such as a large corporate fine under the Sentencing Guidelines). The full import of Caremark, however, was not immediately evident, because at the time of the court's decision the stock market was mid-way through an unprecedented bull run. But with stocks now in retreat and an equally unprecedented number of corporate scandals being unearthed (both as causes and consequences of the declining market), many directors will likely soon face legal exposure to shareholders for allowing ethics- and law-related harms to have occurred at their companies. In an effort to promote greater director involvement in this area, a committee at the New York Stock Exchange recently issued recommended amendments to the Exchange's listing requirements. One section of the amendments would require audit committees to report to full boards on legal compliance. Another would mandate that companies have codes of conduct (covering various enumerated subjects) as well as policies and procedures to support the code. But the NYSE recommendations fail to guide directors on how the duty to oversee compliance relates to the specific requirements that companies have an effective code and supporting policies and procedures. In other words, on an ongoing basis what practical steps should a director take to preserve a company's reputation from the risk of an ethical or legal catastrophe? We have each spent over a decade working with organizations to try to minimize legal and ethical risks and reinforce reputations. And after all this time we have learned that what every parent knows is key to creating a good, ethical environment in a family, works equally well in business organizations of all sizes and types, which is to:
The challenge for every director in America today is to make sure the companies they serve and oversee do these three things. The first practice-clearly communicating standards-sounds easy. It begins with publishing understandable policies and a Code of Conduct, and training employees in these standards. The difficulty for many corporations, however, comes in focusing the right kinds of training on those whose activities pose the greatest ethical or legal risks. For many years companies' ethics and compliance communications were largely focused on inappropriate actions by "rogue" mid- or low-level employees, while paying less attention to senior management. For example, a survey we conducted of 100 ethics officers attending The Conference Board's annual Business Ethics Conference in May of 2002 found that 57% provide annual (or more frequent) ethics training for employees generally, but only 47% conduct annual ethics training with senior management, and only 20% conduct annual ethics training with Board members. One of the most significant lessons of Enron and many of the other recent scandals is that the highest levels of management potentially expose companies to the highest levels of risk. Hence the necessity for boards to send the right ethical message to top management. Boards must also ensure that senior management, through their words and, more importantly, through their actions, communicates the right message to employees. The right message will vary from company to company, but will probably be some variation of "Give 110% to make the numbers, but only in ethical and legal ways." This replaces the message of "Make the numbers, no matter what," which - even if not expressly articulated - is pervasive in many companies. When we tell employees to make the numbers no matter what, then we should not be shocked when they cut corners to do so. This brings us to the second oversight task of board members-making sure that the company environment fosters ethical and legal behavior in the pursuit of profit. This oversight begins with a board seeking to ensure that the company's compliance policies and procedures are indeed addressed to the most significant risks of ethical and legal violations that the company as a whole, and top management specifically, actually face. Many corporations have, over the past decade, developed compliance programs of sorts, but not all have conducted a meaningful company-wide risk analysis, which provides the framework for any truly effective program. Moreover, it is critically important that the board, in commissioning such an analysis, specify that ethical - as well as purely legal - risks be considered. Far too many companies fail to consider the former, with devastating consequences often the result. For instance, in the securities industry, conflicts of interest in analysts' compensation arrangements were, for much of the 1990's, common. These conflicts were often tolerated based on the view that they presented no specific violation of law. However, the New York Attorney General recently opened an investigation into these practices- since joined by his counterparts in other states - which has had a highly negative impact on many brokerage firms' reputations and, in the case of one firm so far, has resulted in a $100 million settlement. As another example of how what are understood to be legal actions can still cause enormous reputational and financial problems for a company, consider the case of Reliant Resources. On May 13 of this year, Reliant Resources disclosed that it had engaged in wash trades with four competitors, a practice "widespread and well known in the industry."1 The fallout of this disclosure was immediate: energy stocks were down across the board, and Reliant Resources stock dropped almost 20% in one day. Christopher Ellinghaus, an energy analyst with the William Capital Group, explained. "The stocks are down because it shows a certain amount of unethical behavior." The lesson of these and many other cases is that for any business whose reputation is important (in other words, most companies), an ethical breach can be every bit as costly as a traditional legal violation. A forward thinking board will therefore actively seek out ethical as well as legal risk areas. (Among the most often challenging ethical issues - not only in the Enron era but generally - which a board should address are those involving compensation and conflicts of interest.) The Board must then review the ethics and compliance program to make sure that it is designed to address the company's risks, and is working in an effective way. Here, too, the issues will be largely company specific, but we have suggested questions to ask-a checklist for board members-in the accompanying chart. Essentially, the board should ensure that it has asked the same types of questions that the government would likely ask in an investigation. The third and final step of board oversight is to review whether employee behavior inconsistent with the company's standards has real negative consequences-even when the wayward employee is in top management, or a top performer. This again seems simple to do, but in practice is not. In our recent survey of ethics officers we asked "What happens to great performers who don't live up to your organization's values?" Almost one third-32%--said these employees are rewarded or tolerated. "What happens to great performers who don't live up to the organization's values-and the law?" is the ethics litmus test for any organization. While there is no one way to ensure that this test is passed, the place to start is to find out how employees answer this question. In the field of ethics, perceptions are as important as reality. Understanding employee perceptions of ethics and compliance issues is usually achieved through surveys and focus groups, and is a critical element of diligent oversight, and an effective program. Overseeing company efforts in these three areas does not require boards to become police officers for their companies, or experts in the fields of ethics and compliance. Both the law and common sense recognize that placing such a burden on boards would be both unfair and impractical. Indeed, as with any business function that is primarily the responsibility of management, excessive meddling by directors could interfere with the proper functioning of ethics and compliance program activities. Moreover, as a matter of corporate law and longstanding best practices, boards may - and in some instances should - rely upon the assistance of outside experts in exercising the fiduciary duty of care. But in light of what - from a corporate ethics standpoint - will surely be remembered as a watershed year, board members cannot go about their duties in a business-as-usual fashion. (Unhappily, 57% of the ethics officers and others surveyed at the Conference Board reported that their boards were "not engaged enough" in ethics and compliance matters, suggesting that there may still be more Enron-like cases out there.) We hope that the steps described in this article and in the accompanying checklist will assist boards in keeping their companies from being named to the dishonor roll in years to come. Board members are always striving to exercise diligent oversight without becoming bogged down in details that are the legitimate domain for management. Asking the following questions of management is a good place to begin to demonstrate oversight in the area of ethics and compliance. Communicating clear standards
Ensuring an ethical environment
Appropriate consequences
Steve Priest (ethical@aol.com, www.ethicalleadershipgroup.com ) of the Ethical Leadership Group in Wilmette, Illinois and Jeff Kaplan (jkaplan@arkin-law.com) of Arkin Kaplan & Cohen, LLP in New York City bring together ethical and legal expertise to assist companies and boards on ethics and compliance matters. Steve is current and Jeff is past program director of The Conference Board's annual Business Ethics Conference. _____________________________________________________ 1 "Energy Trader Admits Faking Transactions," by Neela Banerjee, New York Times, May 14, 2002. 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
Society of Corporate Secretaries and Governance Professionals membership
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Dear Fellow Members:
