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January 2005 Volume No. 1
From the Chairman
By the time you read this, the Society will be operating under its new name. And this newsletter comes to you under its new name: The Corporate Secretary & Governance Professional. Aside from the obvious differences of new words in the name, a new Society logo and website, just what does the change mean for you? The first thing it means is that there will be no change at all in the wonderful network of colleagues who are members of this Society. We still form an immense, knowledgeable support group for each other — and as anyone who's attended a National Conference or an Issues Update or Essentials course can tell you, it's a friendly group of people who know how to enjoy each other's company while sharing practical tips and information. Another thing that won't change is our education and support of people working in the corporate secretary's office. We won't ever abandon that mission. Where we will change is in acknowledging some of the realities that many of us face at work: the challenges of corporate governance. The Society has been offering governance education and support to our members for a long time. Our name change is the almost-final step in that process. It's "almost-final" because, while it's the final recognition of our position in corporate governance, it's also the kickoff for a new program of communications by the Society to our special audience (the SEC, PCAOB, the exchanges, etc.) and the media. We're hoping to do more events with our special audience in the future; events along the lines of the one-day Essentials course that was produced for the World Bank last November at their headquarters in Washington, DC. And Society President David W. Smith is working with Vice President Geoff Loftus on a media-communications plan that may include more-frequent press releases, media-only events, specially edited versions of our research and surveys for the press, and a press-only section of our site to be used as an information-exchange. Inside the Society, the name change will mean additional programs, education and research on corporate governance. Given the demands of our post-SOX environment, our members can use the extra help. We're launching our new name on the eve of turning 60. In 2006, the Society will celebrate six decades since our five founding directors signed the Certificate of Incorporation at the Biltmore Hotel in New York. (The cost of incorporating was $43.50!) What better way to celebrate than by reinvigorating ourselves with the debut of our new name and mission? As you probably remember, we formed an ad hoc committee to examine the Society's role in directors' education. Lydia Beebe, chairman of the Corporate Practices Committee, is chairing this committee, and it met in November. The committee will create a searchable index of director-education programs on the Society's website (a printable PDF version is available now) and is exploring partnerships with organizations such as NACD and The Conference Board. The Society's leadership continues to discuss how to serve our members in the governance area. At the November Board of Directors meeting, we had a lively conversation about whether we need a new, freestanding Ethics & Compliance Committee or whether ethics and compliance naturally fall into the work of our existing committees. Good points supporting each position were made. If you have any ideas or comments about this, please feel free to contact me or David Smith directly and let us know your thoughts. Something else we'd like to hear from you about: Nominations to fill eight seats on our board of directors and a chairman elect. You'll receive a letter from David Smith soon about this, but you may send your nominations directly to ssprague@governanceprofessionals.org. We can look forward to our National Conference in Los Angeles on June 22-26. National Conference Chairman Kathleen Salmas and Society Vice President Suzanne Walker began working on this event about 5 minutes after last year's Boston conference adjourned, and it promises to be wonderful. Any suggestions regarding the conference should be directed to Suzanne at swalker@governanceprofessionals.org. - Kathy Gibson
Issues and Governance Update Photos
The Ombudsman and the Corporate SecretaryDo you really need an ombudsman program at your organization? Stephen M. Cutler, director of the SEC's Division of Enforcement, thinks it's a good idea. In a December 2004 speech to the General Counsel Roundtable, Cutler said: "Sarbanes-Oxley requires that a listed issuer's audit committee establish procedures for the confidential submission of concerns regarding questionable accounting or auditing matters. Let me offer an additional suggestion: the appointment of a permanent ombudsman . . . to receive and investigate complaints — a private inspector general, if you will. That person might report to the audit committee to ensure his independence, and also to ensure that company's board is fully aware of emerging ethical or legal issues reported by company employees." Steve Norman of American Express has been involved from the inception of the idea at American Express more than 11 years ago. Adam Spilka of Alliance Capital Management was involved at his company also from the beginning; his company's ombudsman program is newly created as of the summer of 2004. The two corporate secretaries spoke about their points of view on why an ombudsman office is critical to corporate governance and risk mitigation, their roles in setting up the programs, and their ongoing involvement. Redmond, Williams & Associates, a consultancy dedicated to helping companies set-up and run their ombudsman programs, spoke with these two corporate secretaries who were heavily involved in creating and sustaining their companies' ombudsman programs. RWA: Why did your company open an ombudsman office? Norman: In the early '90s, our new CEO did not want any corporate scandals during his administration; he wanted to protect the brand and asked: What is the best way to prevent a scandal? A cross-functional team researched various options and recommended establishing an ombuds program. Our CEO believed that creating a reliable and credible channel to which employees can turn frees them from fear of retaliation or of their boss taking a situation personally. Such a channel would also allow the company to be able to nip any scandal in the bud, whether it be theft, expense-account cheating, or "front-running" on revenue recognition. The employees are closest to the scene and are likeliest to see any wrongdoing. An ombuds permits people to share their concerns in a manner that is comfortable and provides protection against retaliation. Spilka: At our company, the decision was made for us. In resolving certain regulatory matters with the SEC, we consented to an order that, among other things, required us to establish a company ombudsman position. We quickly came to believe it was the right thing to do. There is not a sense at the company of begrudging compliance; rather, we are enthusiastically following a mission to improve governance and to improve transparency. Our Ombudsman Office plays an important part in achieving that mission. RWA: How does the Ombudsman Office help your company achieve its corporate governance, compliance and ethics objectives? Norman: We feel that governance, compliance and ethics all facilitate the fair and orderly running of a company and fulfillment of its mission in a controlled and proper way. When you have an environment where wrongdoing is likely to be surfaced, the incidence of wrongdoing, in fact, goes down. The key is getting early warnings of problems and an ombuds program is a way, now well recognized, to permit the truth to percolate up. An ombuds complements the whistleblower mechanism, which was a much later development. Spilka: One of our key strategic initiatives is to create a fiduciary culture at Alliance Capital. Our Ombudsman Office plays a key role in that. I think one aspect of effective corporate governance permits information to flow freely and transparently (subject, of course, to ensuring that confidential information remains confidential). RWA: When did your company open its ombudsman office and to whom does it report? Norman: Our program was established in 1994. It reports to the CEO and the Audit Committee of the board. Spilka: Our Ombudsman, Jan Schonauer, started on August 16, 2004. She reports to the CEO and Audit Committee of the Board of Directors; she also provides reporting to the mutual fund boards. RWA: What was your role in setting up the Office? Norman: We formed a cross-functional team of people from all staff departments that have a hand in internal controls, corporate reputation and Code of Conduct Administration. It included representatives from the Secretary's Office, Audit, General Counsel, HR, and Public Affairs. It was a diverse group. The advantage of this process was that each representative brought a different professional perspective as to what would work and what would be desirable. Spilka: As a senior lawyer in the legal department, I had a central role in the design and implementation of the Ombudsman Office together with two others, our General Counsel and our Chief Compliance Officer. First, we needed to get up to speed about the ombudsman role. We then retained consultants to help us set up an office that would adhere to professional standards and codes of ethics, draft communications and reporting, and institute best practices. We championed the role of the Ombudsman internally. We assisted with the selection process and were part of the team that drafted the charter and brochure. RWA: Since the Office opened, what has been your involvement with it? Norman: The Secretary's Office has been involved since its inception in working with the Ombuds to resolve issues. The Ombuds consults with us and refers issues that may violate the Code of Conduct to us. At American Express, the Secretary's Office administers the Code of Conduct and a number of the concerns that the Ombuds Office receives relate to it. The Ombuds Office is also an informal member of the drafting team that the Secretary's Office periodically assembles to review and update the Code. This is valuable because the Ombuds sees organization-wide, emerging and continuing workplace issues. The Ombuds helps us determine what needs to be modified in the Code. Spilka: My colleagues and I have been able to help Jan become knowledgeable about our company and industry. I have organized meetings for her with key company resources so that she can get a good sense of the issues that can arise. Jan introduced herself to the Audit Committee of the Board at their most recent meeting. They welcomed her and said that they look forward to her future reporting. RWA: Is the Office being utilized? Norman: According to the current American Express Corporate Ombudsman, the Ombudsman's Office has provided assistance to more than 27,000 people since it opened. All employee groups use the Office, from associates to senior leaders. It's led to nipping problems in the bud and lowering cynicism about the Company's commitment to resolving employee issues. Every fall, we get a report card as a company in the form of an Employee Value Survey; the integrity scores have risen steadily. The Ombuds program has contributed to these results. It is a useful program which can be measured and has tangible benefits. Spilka: The Office is still in mid-launch and Jan has not yet made a formal report. Our chairman had sent out an e-mail to all employees announcing Jan's arrival and the importance of her role. In addition, the Office has started its awareness program and I understand that people are starting to use the office, although, appropriately, I am not aware of the nature of any inquiries that have been made. RWA: Do you believe that there are issues that would not have been brought forward without the existence of an ombudsman office? Norman: Before the ombuds program, occasionally —once in a great while —a courageous employee would have risked his or her job to advance a problem. However —I use the analogy of a chimney —without a central chimeny shaft offering safety, the number of issues surfaced would not reach the right people at senior levels that now come up through the Ombuds Office. Spilka: Questions can certainly be raised more readily and quickly before they become larger problems. Also, Jan's role is to identify trends and anticipate issues. This permits us to prevent issues before they arise. RWA: How do you know that the Office is effective in executing its role? Norman: There are three ways I feel we can determine if the Office is worth its time and effort. First, I look at the usage. The usage has been strong. A lot of people have come to share their concerns; the people using the Office represent the demographics of the employee population. Some companies outsource a help line function to pick up the phone in an anonymous way. We feel that our usage is more widespread because we have a visible, in-house ombuds function. The second thing I consider is the issue resolution rate: How many people coming to the Ombuds Office had legitimate concerns which were effectively addressed? To be sure, some complaints reflect personalities and cannot be addressed in a way satisfactory to the employee, but our results show that important and legitimate concerns are surfaced through the Ombuds Office. Many of these concerns lead to corrective actions or changes; the proof is in the decline of issues that recur. The third area I consider is employee morale as measured by the annual Employee Value Survey. Integrity and belief in honesty and fairness are key elements of employee morale. If the culture reflects these values, it affects decisions about wanting to remain working here. Happily, we have had great scores. Spilka: I would look at the number of inquiries and the types of issues that I am directly involved in resolving. An ombudsman reports data that indicate effectiveness. While maintaining confidentiality on an individual level, an ombudsman provides statistics to senior management and the board regarding types of issues, demographics of those using the office, and issue trends. An ombudsman reports which formal channel (e.g., Compliance, Legal, Human Resources, and Internal Audit) addressed the issues and what percentage of issues resulted in change. An ombudsman identifies changes that have significant impact on a company. Our chairman has said that the Ombudsman Office is successful when employees understand that it is a benefit to them and will improve their work lives. He views the Office as a metaphoric and an actual benefit to employees —a safe place where they can go to raise issues. Ombudsman program success exists when employees see Alliance as a better company, and a better place to work, due to the existence of an effective Ombudsman. RWA: How is the Office different from other company channels such as HR, Legal, Compliance or Audit? Norman: There are two ways that the Ombuds office differs from other channels in the company. First, it is different in providing complete confidentiality, official neutrality, informality, independence and protection from retaliation. Secondly, it is different in its ability to broker. The Ombuds has an organization-wide view and knows where and how to hand off a wide variety of issues and concerns, e.g., this one should go to Audit, this one should go to the General Counsel's office or this one is a Code of Conduct violation. It is a lot more efficient. It is like having a central clearing house. Spilka: Our Ombudsman Office is distinct from formal corporate governance structures. It is additive to those structures and independent from them. Also, Jan's independence from other channels is underscored by the fact that she reports to the CEO and Audit Committee; there are no other "organizational boxes" above her. Somewhat counter-intuitively, the ombudsman is a company employee who is not "of the company." Conversations with her do not give rise to a legal obligation on part of the company until and unless the question had been brought to a formal channel. To me, that is a fundamental difference. It is the only informal channel. An employee can have an off-the-record conversation with a neutral party. RWA: Could an employee help line (hotline) function as effectively as an ombudsman does? Norman: My guess is no, and it would not be used as much as an in-house ombuds. Anecdotally, from other companies that have tried help lines, they don't get as many calls. Also, I believe that an ombuds function indicates that the company is more serious about reaching out and providing a haven for people who have concerns. I remember that in the Army, they have an Inspector General and he is visible; the Corporate Ombuds is visible and, I think, presents a far more inviting image than a remote 800 number. The in-house Ombuds in our company conducts an extensive awareness process to personally inform all employees about the role and practices of the program. Also, the Ombuds is a professional who has in-depth knowledge about the company and its resolution channels. The Ombuds, as a company employee, has a higher likelihood of being more sensible and efficient in dealing with company-specific concerns than an outside 800 hotline can be. Through reputation, an in-house Ombuds still has to establish whether the office keeps its promises of anonymity, confidentiality, and freedom from retaliation. This happened here very quickly. Spilka: No. At the beginning of our process of setting up the Office, there was some consideration of whether a Sarbanes-Oxley hotline could constitute compliance with the SEC requirement. Once we understood better the role of an ombudsman, we concluded that the SEC order requires an ombudsman to make reports, and that we needed an ombudsman to be analytical and proactive. Unlike persons who answer help lines, an ombudsman is a senior, skilled executive who has in-depth knowledge of the company and is trained by The Ombudsman Association. An ombudsman can probe beneath the surface of the issue, understand nuances and be creative about helping the employee identify the most appropriate resolution option. Additionally, an ombudsman ensures that any imminent threat of serious harm is surfaced. A hotline is more passive. A passive recipient of information cannot do what an ombudsman does. A hotline cannot make reports, cannot be analytical about existing and emerging trends, cannot be proactive and cannot help senior management determine the best course of action. Help lines report to a formal channel and this lessens the likelihood that an employee who is very concerned about confidentiality will come forward. RWA: Do you believe that the total confidentiality of the Ombuds precludes serious issues from coming to light? Norman: No. Total confidentiality helps bring serious issues to light. The Ombuds hear about all types of serious issues; e.g., the bullying leader, the expense-account cheater, the potential pockets of employee unrest, or incipient financial-reporting concerns. Important issues get surfaced to the right people in the organization; I have seen this happen. When an important issue comes to the Ombuds, the Ombuds helps the employee determine the best place to direct it. Problems get fixed without having to identify the individual. Additionally, if there is imminent threat of serious harm, the Ombuds has an obligation to get the issue surfaced to the most appropriate source, while striving to maintain the anonymity of the employee coming to the Office. Employees go to the Ombuds with serious issues because they want to get those issues out and addressed. Net-net, it is in a corporation's financial interest to have no scandals. The Ombuds Office is a way to nip scandals in the bud and bring them to light early. Spilka: I believe that the Ombudsman has the judgment to bring forth serious issues as ombudsmen are obligated to do under The Ombudsman Association's standards of practice. Different kinds of issues require different kinds of attention. I believe the ombudsman we hired has the experience and judgment to handle all issues, particularly serious issues, appropriately. RWA: What types of companies do you believe should have an ombudsman office? Norman: I cannot limit it to any one industry. You can have some bad apples in financial services, healthcare, manufacturing, retail, or anywhere. Spilka: The larger the company, the more regulated it is, and the more compliance issues that might arise —the more highly I would recommend an ombudsman. RWA: Is there anything else that you would like to add? Norman: The only thing I reflect about is the uniqueness of the word. "Ombuds" is a funny word. I'm not sure of the etymology, but I wouldn't change it. It is one of a kind. [Editor's Note: According to Merriam-Webster's Unabridged Dictionary, "Ombudsman" was borrowed from Swedish, where it means "representative," and ultimately derives from the Old Norse words "umboth" ("commission") and "mathr" ("man"). In the early 1800s, Sweden became the first country to appoint an independent official known as an ombudsman to investigate complaints against government officials and agencies.] Spilka: Being ombudsman is a tough task to do well. We have discovered that "bedside manner" is important. It is extremely important to have the right person in the job. In addition, sponsorship is critical. We have good internal support and involvement. I worked closely with our Chief Compliance Officer and newly appointed general counsel in setting up the program. We also worked closely with the directors of Human Resources and Internal Audit. HR, Audit and Legal are among the key formal channels that must understand and support the role; the Ombudsman will interact frequently with these areas. I think our ombudsman office is stronger because it had the benefit of their advice and input as it was being designed.
Committee NewsSecurities Law Committee
Corporate Practices Committee
Public Company Affairs
A New Player in Proxy Voting ServicesThe arena for proxy voting services already seems crowded. There's Institutional Shareholder Services (much better known as ISS) and Glass, Lewis & Co. Both aim to help investors by influencing companies' proxies. Is there really room for another such service? Steven M.H. Wallman, former SEC commissioner, thinks there is — especially if it's significantly different from the others. So he created PROXY Governance, Inc. We had a chance to interview Wallman, who is CEO of FOLIOfn, the parent company of PROXY Governance and is also the interim secretary and non-voting member of the Policy Council, which acts as an impartial review board for PROXY Governance. Also at the interview was James P. Melican, one of the three current Managing Directors of Policy of PROXY Governance. Prior to joining the firm, Melican was Executive Vice President of International Paper Company, where he had responsibility for the company's legal, corporate secretary and investor-relations functions. Melican has been a recognized expert on corporate governance for two decades, having served as co-chair of the Corporate Governance Committee of the American Bar Association's Business Law Section and on an A.B.A. select committee that contributed to the American Law Institute's Principles of Corporate Governance. How is Policy Governance different? Wallman: We're competing directly with the others by providing voting recommendations, but we have a different mission. We take as our touchstone the notion that the best way to implement good corporate governance is to look at what will best promote long-term shareholder value — how to "grow the pie". Others view the question of "how to vote?" as simply shareholder power vs. directors/management power — which we see as a zero-sum game. On a different level, what distinguishes us is that our evaluations are produced on a "company-by-company" basis. There are no "always-vote-this-way" proposals as far as we're concerned. Proxy proposals need to be judged within the context of the company's mission, performance, its executive-compensation structure, board independence, existing governance structure and other items. We feel you can't have a religious view that all things regarding corporate governance have to be a certain way. To us, there is no one size fits all. Once our staff comes to a conclusion on a proxy proposal, there will be a rationale for it stated clearly and transparently so that our subscribers can see the sense of the decision. Through our Policy Council, we ensure a thorough review of our staff's policy recommendations and make revisions if the Council believes that a different approach would further enhance long-term shareholder value. The Council is composed of individuals who are recognized for their expertise and independence. [The Policy Council's current members are the University of Georgia's and former FASB Chair Dennis R. Beresford; Liz Fender, former TIAA-CREF corporate governance expert and Secretary of the International Corporate Governance Network; Scott A. Fenn, former President and CEO of the Investor Responsibility Research Center; James K. Glassman, resident fellow at the American Enterprise Institute; Joseph Hinsey, IV of the Harvard University Graduate School of Business Administration; Robert E. Litan, Senior Fellow, Economic Studies, of The Brookings Institution; Erik R. Sirri, Professor of Finance at Babson College and former SEC Chief Economist; and William C. Steere, Jr., Chairman of the Board, Emeritus, of Pfizer, Inc.] How do you handle potential conflicts of interest? Wallman: We don't sell consulting. Only voting recommendations and voting agency services. We're not beholden to subscribers, our policy staff doesn't have an equity interest in PROXY Governance so there is no reason to change a recommendation or policies to help sell consulting services, we do not sell special services to short sellers, and we have a completely independent Policy Council. That makes us as conflict-free as possible. Why another proxy-services organization at this time? Wallman: I started to look at this kind of service back in the early '90s. We then again looked at this when I started FOLIOfn in the late '90s. Then, it wasn't the right time for us to pursue it. Now we find we have the combination of the right time and the necessary ability to do it. And the regulatory environment makes it, if anything, more urgent than ever. We [FOLIOfn] were approached by a number of investment advisors asking for help with voting recommendations when the SEC started to change its rules potentially requiring advisors to disclose their votes. The Business Roundtable asked us earlier this year where we stood in launching our service and stated they believed there was sufficient demand for us to accelerate our plans and launch for the '05 proxy season, if possible. We thought there was, and so that's what we've done. Recognizing that you only make proxy recommendations on a company-by-company basis, we'd love to have your thinking on some broader issues. What's your reaction to Sarbanes-Oxley? Melican: Sarbanes-Oxley has brought some benefits, but at the same time the amount of time and expense necessary to comply with it, especially 404, was underestimated. Does Sarbanes-Oxley create long-term value for shareholders? In some ways, yes. Requirements that people inside the corporation use extra scrutiny to ensure accuracy of data are good. I think that in the pre-SOX era, some of the old certifications of accuracy had become rote. Executives would sign-off without being careful. Now, especially with the criminal aspects of SOX, there's a lot more review before certifying. But I still worry that too much time and energy might be spent dotting i's and crossing t's to contribute value to shareholders. Streamlining compliance so that senior-level officers aren't putting quite so much of their own time into compliance could add long-term value to shareholders. What do you think of the current push for organizations to split the positions of chairman and CEO? Melican: I have to go back to our company-by-company approach. Let's assume that in one case you had a corporation with someone who had been both chairman and CEO for a few years and had a few years to go in that position before retirement was likely. If the company had consistently been performing well and returning value to its shareholders, what would be the rationale for splitting the jobs? On the other hand, if you had a company that had not been performing well for several years, and the feeling was that the CEO, as chairman, was dominating the board's deliberations, you might want to split the positions. It might free the board to push for a new direction for the company. What do you think of declassifying boards? Melican: There are the obvious reasons for declassifying the board. But, what is the purpose of the proposal in a given situation? If the purpose is to send a message to the board that the shareholders are not pleased, that might be more forcefully done by voting on the 3 or 4 members up for election in a staggered board? Having directors empowered to act for the shareholders without worrying unduly about the CEO's wishes — because they do not need the CEO's tacit approval to stand for election and in fact have a term that might in some instances extend beyond that of the CEO's — might be a very good thing and would tend to argue for a staggered board. Consequently, as mentioned, it depends on a number of factors as to how we would likely come out. Should members of some board committees, such as Audit, be paid more than other members of the board? Melican: There clearly is a tendency to pay audit chairs and/or committees more because of the requirements that all but demand they spend considerably more time than other directors. Should the number of outside directorships a board's members have be limited? Melican: There probably is an absolute number that is too many, but there are situations where someone who basically is a professional director could handle many more directorships than an executive who was fully employed elsewhere. I'd say it's likely that, barring unusual circumstances such as impending retirement, CEOs should be limited to one or at most two other boards besides that of their own companies. On the other hand, the cross-fertilization of ideas that a director can bring into the boardroom by having served on other boards can be very useful. I think boards need to be careful about how strict they want to get with this policy. - Geoff Loftus
World Bank Essentials Course
The Corporate Secretary & Governance Professional is published quarterly 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 the content of this newsletter should be directed to Geoff Loftus: (212) 681-2000, gloftus@governanceprofessionals.org; or Hilary Johnson: (212) 681-2013, hjohnson@governanceprofessionals.org. Inquiries regarding membership or publication orders should be addressed to:
Society of Corporate Secretaries and Governance Professionals membership
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Dear
Fellow Member,
