"Building a Future, Honoring Our Past"

The Society's 60th Annual National Conference
at the Loews Philadelphia Hotel
June 28 - July 2, 2006

National Constitution Center: Part of Our 60^th Anniversary Celebration

Our Pre-Conference on Wednesday, June 28: In the morning, our "Ethics Workshop" will be conducted by Professor Eric W. Orts, the Guardsmark Professor of Legal Studies and Business Ethics at the Wharton School of the University of Pennsylvania. In the afternoon there will be a session entitled "What Makes a Corporate Secretary Marketable?"

The Conference Business Program begins on Thursday, June 29. The program includes speakers Frank G. Zarb, Sr., former chairman of Nasdaq and the NASD; SEC Commissioner Paul Atkins; and Harvey Pitt, former SEC chairman. The Luncheon Speaker will be Michael Beschloss, NBC News' Presidential Historian and best-selling author of The Conquerors.

Topics include: Executive Compensation Disclosure, Navigating a Crisis, The Press's View of Corporate America, Management of the Board and Its Committees, Challenges at Private and Small and Mid-Cap Public Companies, Dealing with Governance Rating Agencies, Managing the Future, and Effective Minute Taking.

Records Management: Interview with Marty Provin

Geoff Loftus interviewed Marty Provin, executive vice president at the Jordan Lawrence Group, a consultancy specializing in records management. (The interview was by e-mail.)

What are the current legal/regulatory issues regarding records retention?

Currently there are four significant legal and regulatory issues regarding records retention and perhaps more appropriately records management.

The first issue is "regulatory tagging" — applying specific regulatory requirements to relevant record types. Companies can no longer look ONLY at retention requirements of records.

There has been a flood of federal and state regulations that mandate specific requirements for the management, protection and ultimately the destruction of certain types of records.

FACTA, HIPPA, Gramm-Leach-Bliley, the New Jersey Identity Theft Prevention Act and California SB 1386 are just a few examples. All have specific requirements for managing and destroying hardcopy and electronic records that contain consumer and or personal information. (In fact, legislation has been adopted or introduced in thirty-five states requiring records management and disposal — records about your employees and/or your customers.)

And the USA Patriots Act requires the rapid production of certain types of records.

And of course Sarbanes-Oxley requires certain records be retained and made readily available as well as precludes the destruction, alteration, or falsification of records. Other parts of Sarbanes-Oxley such as section 404 are very relevant to corporate records management. Records after all, are really the bedrock on which "controls" are built.

The second pressing issue is the over-retention of records. This is at the heart of nearly every records-related "real world" problem that companies face. The amount of hard-copy and electronic information that companies maintain is swelling at exponential rates. Over-retention of records stems from a couple of causes. Far too often, companies have inadequate record naming standards and retention practices. Seldom does the practice of how a company actually manages its records reflect the corporate policy or retention schedule. There is often tremendous inconsistency across departments, lines of business and media. The second contributing factor is more of a conscious decision by companies. Realizing they don't have adequate controls and fearing they might not have a record they need — they simply keep everything. This can create enormous problems in terms of costs, efficiency and compliance. The notion of "keep everything" to be safe and assure compliance often makes it impossible for companies to comply with record management obligations and can expose the company to unnecessary risk and costs.

Let me interrupt you for a moment — what would you suggest as a solution to over-retention?

Companies need to connect policy to process. Seldom do you see controls in place that ensure the hard and fast requirements defined in the corporate records policy are executed in the processes that create records. Generally, employees are free to make their own decisions about what to call records, where to retain them and for how long with little or no oversight, no audit process or consequences for ignoring the policy.

Back to your four significant legal/regulatory issues, you were on the third:

Third is hold management, perhaps the most important issue, and the one requirement that many companies struggle with. When litigation or an investigation is reasonably anticipated, companies must have the ability to identify and secure relevant records. The inability to enact precise and documented holds on relevant records was at the heart of many familiar cases.

Arthur Andersen provides excellent illustration of a couple of issues. As we now know, Andersen had a policy covering records organization, retention and destruction. Their policy also provided that in case of threatened litigation no related information was to be destroyed. Andersen however did not connect their policy to practice.

Andersen failed to stop records from being destroyed when litigation was threatened. Today it is also clear that prior to the Enron investigation, Andersen had not been adhering to their policy of timely destruction of records as many of the documents involved in the infamous shredding were actually records that, according to Andersen's policy, should have been destroyed up to 2 years earlier.

In the words of Federal Prosecutor Matt Friedrich in his opening remarks against Andersen in the obstruction of justice case "This was not a routine policy. It had never been enforced the way it was in October of 2001."

What would you recommend as a hold-management policy?

It's not about having a hold-management policy; Andersen had this. The key is having precise knowledge of what records you have and where you have them. It is also imperative that the organization have a formalized, documented, process for placing records on hold. Also, don't have unnecessary records to begin with.

And returning to your significant issues again, you were about to discuss the fourth:

Lastly, no other issue will be more scrutinized then whether a company can demonstrate that it systematically, non-selectively enforces its intentions as stated in the corporate records management policy. Enforcement is the level of controls put in place to ensure company policies are linked to actual daily practice. This includes adherence to the retention schedules, elimination of employee discretion, and the proper control of records subject to pending or imminent government investigation, litigation, or audit. Corporate records management is perhaps the only area of corporate governance in which compliance is routinely left to the discretion of the employees.

To meet these types of requirements, companies must first understand what records they have and where they have them and then be able to marry specific requirements to the relevant record types and supporting processes. Not just retention requirements but also the requirements for management and destruction.

What do you think needs to be the minimum for any corporate records management policy?

1. Clearly stated intentions
2. Provide employees guidance with how to comply with the policy
3. Audit against the policy just as you would any other policy
4. Have consequences for non-compliance
5. Tie policy into the processes that create and manage records

Regarding electronic-record keeping, what are the technology issues? Costs? Security? Back-up?

An age old problem in business is that companies tend to operate in "silos." Different groups operating independently of one another on related issues. This becomes painfully clear when you discuss electronic-record keeping.

Unfortunately our experience has been that legal, IT and the business side rarely work collectively on the issue of managing electronic records and the results are clear; costs are too high, security is compromised and results are generally poor.

Look at Arthur Andersen — is one to think that this firm had not tackled the issue of electronic record keeping or that it failed to make adequate investments in technology? No, Andersen's policy explicitly addressed electronic records.

The fact is that many initiatives around electronic record keeping don't deliver the desired results because they fail to adequately incorporate the requirements of the various stakeholders. According to the November 2005 CIO Magazine "Analysts report that as many as 71 percent of software projects that fail do so because of poor requirements management." Initiatives around electronic record keeping are no different.

Before a company can begin to have productive conversation about electronic record keeping they need to start with a clear understanding of where they are and develop clear objectives of the various stakeholders (legal, I.T., business). They must also realistically consider their culture and how practical it is that new requirements will be accepted. Companies should also consider the experiences of other organizations and even draw from their own related experiences.

With this said, when most people say electronic record keeping they are most often talking specifically about e-mail. E-mail causes many sleepless nights for legal, I.T. and senior management. In litigation or investigation, e-mail is a common starting point. First of all, the threat alone of having to produce volumes of e-mail is chilling and can force unmerited settlements. In a 2005 survey produced by the ABA, respondents reported settling cases to avoid the costs of electronic discovery that can run in excess of $2 per message.

And while there is technology that can be implemented to reduce the volume of e-mail being retained and enable the rapid search for e-mails based on various attributes, the fact still remains that e-mail and the management of e-mail is very dependent upon the actions of employees. In the end, there are no "solutions" for e-mail but there are very effective strategies. And a company does not have to spend a fortune to be effective in managing e-mail or any of its electronic records. It all begins with developing a clear understanding of where they are and what each stakeholder is trying to accomplish.

What suggestions do you have for those suffering from e-mail driven sleepless nights? What kind of policies would you recommend?

Before drafting policy or investing in technology, those suffering from sleepless nights should get an understanding of how their organization is really using e-mail. Of all the e-mail flowing through the servers, which are really records that they care to retain versus the majority of e-mails that don't serve a valid business purpose? What is the relationship between various job functions and e-mail usage? What resources do you currently have available around e-mail and what initiatives may be in the works?

The answers will be surprising, and they are the first step towards more restful nights.

Comment Letter: Smaller Public Companies

Below is the text of the comment letter from the Society's Securities Law Committee to the Advisory Committee on Smaller Public Companies at the SEC. The letter was prepared by Barbara Blackford and Karl Barnickol.

Re: Release Nos. 33-8666; 34-53385; File No. 265-23

The Society of Corporate Secretaries & Governance Professionals (the "Society") appreciates the opportunity to respond to the request for comments made by the Advisory Committee on Smaller Public Companies (the "Advisory Committee") in its February 28, 2006 release entitled "Exposure Draft of Final Report of Advisory Committee on Smaller Public Companies" (the "Exposure Draft"). The Society, founded in 1946 as the American Society of Corporate Secretaries, has over 3,800 members representing approximately 2,600 companies. Its members are responsible for public disclosure under the securities laws and matters affecting corporate governance. Most of the members' companies are public companies and many of those companies would be significantly affected by adoption of the recommendations of the Advisory Committee.

Our members are involved personally with all of the tasks required to comply with securities laws and the listing requirements of the New York Stock Exchange, the American Stock Exchange, and NASDAQ and have had leading roles in their companies in implementing the requirements of the Sarbanes-Oxley Act ("SOX") and the related rules adopted by the Commission and the exchanges. Based on that experience, we support generally the recommendations contained in the Exposure Draft and the underlying rationale for those recommendations which would be particularly beneficial in mitigating the cost of compliance with Sarbanes-Oxley without seriously diminishing investor protection:

There are certain aspects of the Exposure Draft where we have concerns about the conclusions or believe there is a need for further clarification:

• Revenue Filters — The Exposure Draft allows "microcap" and "smallcap" companies to opt-in to one of two differing methods of compliance with SOX §404. While the primary standard for establishing these two tiers of smaller companies is based on their respective market capitalization, the availability of these alternate §404 compliance rules is further limited by a revenue cap. Microcap companies with product revenues of $125 million or more (and smallcap companies with revenues in excess of $10 million) would not be eligible for the conditional relief from compliance with the audit requirements of 404 proposed in Recommendation III.P.1. Smallcap companies and microcap companies with revenues in excess of $125 million would similarly not be able to avail themselves of the limited relief from compliance with §404 in Recommendation III.P.2 if their revenues were $250 million or greater. The exposure draft posits that these revenue levels establish that the business of the company is so complex that the more informal assurances of integrity of the financial statements can no longer be relied upon and these companies should therefore bear the full burden of §404 compliance. In fact, in our experience revenue does not equate to complexity. Many businesses operate on very modest margins between their raw materials or suppliers and their revenues. Obvious examples are contractors and distributors—most of their revenues, which can be substantial, come "in-the-front-door" and quickly go "out-the-back-door" to vendors and subcontractors. The underlying business is not, as a result, inherently complex. The revenues of certain other businesses are highly dependent on the price of one or two commodity raw materials which can fluctuate widely depending on world market conditions. These businesses may have significant revenues because they pass-through raw material costs, but have simple business models with small net income. We believe the market takes into account all of these factors when establishing a market capitalization, and that as a result, market capitalization is a more sophisticated and appropriate measure.
  
  While we believe revenues are a very poor predictor of complexity, and should not be used to determine eligibility for either of these two Recommendations, if the Advisory Committee determines to recommend a revenue cap, then it should be derived from the percentage-of-the-market concepts similar to those incorporated in Recommendation II.P.1 or add alternative inflation adjustment criteria. Any flat dollar limit will, in a few years, become obsolete as a result of inflation as has happened repeatedly with other dollar limit provisions contained in the rules of the Securities and Exchange Commission. Without a self-adjusting cap, the opportunity for significant cost savings contained in Recommendations III.P.1 & 2 will annually disappear for some significant fraction of the covered companies even though their economic situation has not changed in inflation-adjusted real dollar terms.
  
  
• Opt-in Feature — We are concerned that auditing firms will continue to be very concerned about their potential liability and that they will place extraordinary pressure on their audit clients to "opt-out" of Recommendations III.P.1 & 2. Thus, the substantial benefits of these Recommendations (assuming their adoption by the Securities and Exchange Commission) will be lost for many smaller companies. We suggest that the Advisory Committee buttress these recommendations with language whereby the Commission would make clear that auditors do not incur additional litigation risk by allowing their clients to implement Recommendations III.P.1 & 2.
  
  
• Collapsing Regulation S-B into Regulation S-K — Because of the very low dollar limits which have existed for eligibility to use Regulation S-B, few of our members or their companies have been able to avail themselves of its provisions. The Exposure Draft also indicates that many advisors to companies eligible to use S-B are reluctant to allow those companies to take advantage of it. We believe this is in part because those companies would then present financials which the market would view as an aberration because they are so rarely seen. Thus it is difficult to know whether consolidating S-B into S-K will actually result in a cost savings to the increased number of companies who would be eligible to use the equivalent of the S-B rules incorporated into S-K or whether market forces will tip companies toward full S-K compliance. Having two separate standards, especially for the financial statements, is probably not a significant benefit for smaller companies if they are rarely ever used and setting up two standards in Regulation S-K risks adding complexity and confusion to the rules. Given this uncertainty, we would suggest that the Advisory Committee consider either:
  
  
  • a pilot program which retains the current S-B (or the modified version with two years of balance sheets as proposed in the Exposure Draft) for the class of microcap companies which would evaluate whether there is significant usage of the separate standard, or
    
    
  • simply adopting a two year rule on balance sheets and income, cash flow and change in shareholders' equity statements for all microcap and smallcap public companies and allow the market to determine whether it is acceptable for companies to omit the third prior year from certain types of public disclosures, such as offering documents. As noted in the Exposure Draft, all of the prior year information is now easily accessible through various web-based sources.
    
    
• Transition Rules — We believe that further guidance is needed from the Advisory Committee detailing how the transition rules will work for companies that meet the qualifications for the exemptive relief provided in the Exposure Draft. The Exposure Draft currently contemplates allowing the SEC to follow precedent in drafting the transition rules and cites examples of such transition rules, including rules regarding movement to and from Regulations S-B and S-K, non-accelerated and accelerated filer status and well-known seasoned issuer eligibility and non-eligibility. We believe that the cited transition rules do not provide the proper structure to the exemptive relief provided in the Exposure Draft. Specifically, previous transition rules have contained provisions that require additional disclosures upon reaching certain thresholds (such as moving from Regulation S-B to Regulation S-K) and other transition rules utilize guidelines that are difficult to attain when moving to a less restrictive set of rules (such as moving from accelerated to non-accelerated filer status). Thus, we propose that the Advisory Committee recommend the following general guidelines for the SEC to follow when drafting the transition rules:
  
  
  • When moving from a category that has more exemptive relief to a category with less (or no) relief (i.e., a company's market capitalization increases), companies should be allowed to rely on the prior years' relief. By making relief permanent, the company would not be forced to provide any additional compliance testing or financial data for prior years once a new, higher threshold has been reached. This "bright line" provides assurance to small companies and eliminates the incentive (to both the company and its auditors) to preemptively perform such testing or auditing of financials, which would eliminate the benefit of relief.
    
    
  • When moving from a category that has less exemptive relief to a category with more exemptive relief (i.e., a company's market capitalization decreases), companies should be allowed to immediately use such exemptive relief (and consequently rely on such relief on a permanent basis); provided, however, that one condition is met: the company has met the market capitalization threshold by ten percent or more. This ten percent capitalization requirement eliminates having companies that are near thresholds jumping in and out of categories on a yearly basis due to market fluctuations, while allowing companies whose market capitalizations have had a large financial decrease to immediately utilize exemptive relief.
    
    
• COSO Framework — The Advisory Committee's Recommendation III.S.1 regarding the COSO Framework and AS2, while categorized as a secondary recommendation, is, in fact, fundamental to achieving a cost-effective system for assessing internal controls. As indicated in the Exposure Draft, we also do not believe that the current version of COSO's revised guidance for smaller companies will result in any meaningful change in the burden of compliance with AS2. Thus, it is essential that COSO substantively revise the Framework in the context of smaller companies and, in particular, address the issue of materiality which, in practice, has become a very low threshold for assessing the effectiveness of internal controls in smaller public companies.

As noted above, the Society endorses the recommendations in the Exposure Draft to address the significant differences between smaller and larger companies and the very large unexpected financial burden that is falling on the smaller companies. These companies are, as noted in the Exposure Draft, the primary generators of new jobs in the US economy. As currently structured, the regulatory burden falls disproportionately on the smaller companies and makes them less able to compete with either their US-based competitors or their ex-US competitors of any size. The impact is clearly demonstrated by the rush of new offerings to London to avoid this burden. Thus, there is a real need for the Advisory Committee's recommendations to be adopted to avoid placing smaller US companies and US markets at a competitive disadvantage.

Comment Letter: Compensation Disclosure Proposed Rules

This is an excerpt from the Society's comment letter on the proposed Executive Compensation and Related Party Disclosure rules. The letter was prepared by a drafting committee drawn from the members of our Securities Law Committee:

The full letter is available on the Society's site as a 51-page PDF.

Because the proposals are complex and our letter is lengthy, we identify the following overarching comments and concerns with the proposals. These comments and concerns, as well as many other comments to address specific concerns and questions raised in the proposal, are addressed more completely below.

• Based on our interaction with shareholders, we agree that an overhaul of the current proxy disclosure rules is appropriate. We support new rules that would increase transparency and assist the reader in focusing on total compensation for senior executives. And as we have in the past, we strongly support the plain English requirements.
  
  
• The compensation committee is the body responsible for setting executive compensation policy and for implementing the policy by choosing compensation elements and awarding the actual compensation. At the same time, we think there is much merit in the proposed content for the CD&A. Accordingly, we think the report of the compensation committee should be retained, and the guidance contained in the proposals for the content of the CD&A be adopted and applied to the compensation committee report.
  
  
• We believe the proposal worsens the current lack of distinction between compensation that has been paid or accrued in a definite amount, such as salaries, bonuses, and stock granted or vested with no pending conditions or contingencies, and compensation that is contingent, the value of which can not be known until some time in the future, such as stock options and performance-based awards. We think the distinction is meaningful and should be reflected in the disclosure rules. Two of the most meaningful differences are that the value of contingent compensation may be from zero to a much greater number, and that value cannot be known until some point in the future. Even those forms of contingent compensation, such as options, for which estimation models exist, are almost certain to produce different values when actually realized in the future. The proposed presentation of these values will result in duplicative and misleading disclosure. As you will see in our comments, we have offered several models that take into account these important distinctions, but also provide the greater transparency called for in the proposals.
  
  
• Multiple counting of the same compensation is inevitable under the proposals. As an example, deferred compensation and earnings on it will be disclosed in the year accrued in both the Summary Compensation Table and the Nonqualified Defined Contribution and Other Deferred Compensation Plans Table. The Aggregate Balance Column of that table will again reflect those amounts, as well as the previously-disclosed amounts from prior years. These aggregate amounts would include balances from years for which the named executive officer may not have even been an executive. The pension-related disclosures contain similar redundancies. An approach less wedded to disclosing every point in the life cycle of an element of compensation would result in more meaningful disclosure. We believe our comments include several alternatives that would provide the desired transparency without the redundancies and without as much likelihood of multiple counting.
  
  
• Unintended consequences will follow if these proposals are adopted as proposed. For example, some executives have had a practice of deferring compensation under programs that are available to employees well beyond the ranks of executive officers. Deferred compensation at many of these executives' companies is no more than a general obligation of the company and does not result in above-market investment returns to the individual. These executives, especially if they have had long careers with their companies, may have large deferred compensation balances and will now appear to be grossly overpaid compared to peers who followed a different "savings" path. We believe this effect of the proposals likely will pressure these executives to take funds out of deferred compensation and refrain from deferring compensation in the future. This will not mean that these executives are any the less well-paid. Rather, it will mean that they took their compensation currently to avoid having their deferred compensation savings balance counted in the proxy statement disclosures and, based on the mischaracterized amounts, being vilified in the press. This does not seem to us a proper goal or outcome of compensation disclosure.
  
  
• The complexity that will result from the proposed disclosures, including the many details resulting from multiple disclosures of the same compensation, may actually make it more difficult to understand total compensation, by providing an overload of information without a clear focus. We believe our comments help shape the proposed disclosures by eliminating some of the detail and redundancy, in order to better support the goal of compensation disclosure that is clear, thorough and understandable by all investors, not just compensation experts.

Our comments below follow the order taken in the Proposed Rule, and we are restating in bold those Requests for Comment to which we are responding.

II. Executive and Director Compensation Disclosure

A. Compensation Discussion and Analysis

We agree that many Compensation Committee reports could benefit from a more analytical approach, similar to the analytical discussion of financial results in the MD&A, which would result in more substantive, transparent disclosures. Our members understand from first hand interactions with shareholders that there is a strong desire in the investor community for such information. A number of our members have made meaningful advances in providing such information, and we anticipate that, as was the case with the plain English pilot program, the leaders in embracing the new disclosures would come from among our members.

• Is there any significant impact by not having the report over the names of the compensation committee of the board of directors?

Not having the compensation report over the names of the compensation committee makes it appear to be a report of management. This is inappropriate under good governance procedures, which call for the independent directors to make compensation decisions.

• Should we require all of the proposed disclosures discussed below in addition to those in the Summary Compensation Table, or does the Summary Compensation Table itself provide an adequate picture of compensation? Is there some other combination of the Summary Compensation Table with other proposed disclosures that would fulfill our objectives?

We agree that investors want additional information and detail, as specified in the proposal. However, as discussed below, we have concerns that some of the specific proposed disclosures may be confusing and unnecessary. We advocate a two-table approach to total compensation, one that covers all aspects of pay earned during the year and a second that covers grants/awards made during the year and outstanding grants/awards that are contingent because performance periods have not been completed or vesting dates have not been reached. See Appendix One for our suggested formats. We also recommend that smaller public companies be allowed to use this two-table approach to compensation disclosure without having to provide the other compensation-related tables contained in the proposed rule.

a. Total Compensation Column

• Should we include a requirement to disclose a total compensation amount?

We agree that investors wish to see a total compensation amount, and we do not object to its disclosure. We believe that many compensation committees consider a total compensation amount annually and at the time any new component or any increase in compensation is considered.

However, the proposed approach to providing this information confuses two logically separate concepts and is almost certain to result in double counting. We believe a total that includes both earned amounts and contingent amounts may be misleading because the executive may never receive the contingent amounts.

Our first choice is for a two-table approach as discussed above and shown on Appendix One. As an alternative, we suggest two total numbers — "Total Earned Compensation" and "Total Contingent Compensation". We believe it is important for investors to understand the very real difference between compensation actually earned for the year and the estimated value of contingent compensation that may or may not be earned in the future. Compensation earned is concrete and readily ascertainable; contingent compensation is based on estimates that may prove to be vastly different from amounts ultimately realized, if at all, either because the amount is never received because performance/time hurdles are not met or because the value of the award decreased or increased over time. Two separate total columns would help make this distinction clear.

d. All Other Compensation Column

i. Earnings on Deferred Compensation

• Should we require, as proposed, disclosure of all earnings on compensation that is deferred on a basis that is not tax-qualified or should we require disclosure only of above-market or preferential earnings? If the latter, please explain why such an approach is more useful or informative for investors than our proposed approach.

For all compensatory items relating to deferred compensation, disclosure in the "All Other Compensation" column of the Summary Compensation Table is appropriate, with details provided in a footnote.

We agree that all company match contributions for the prior fiscal year should be disclosed. Our reasoning is that the match is compensatory. We believe that the appropriate measure is the additional amount accrued for the executive during the most recent fiscal year and not the historical balance to his account. This will permit a better comparison of other annual compensation provided to executives not only at the registrant but also with executives at other companies.

We agree that all guaranteed returns and above-market earnings on account balance type deferred compensation that accrued during the most recent fiscal year should also be disclosed where the return is based on a fixed rate of interest. Where the rate of return is based on a return on equity, e.g. a mutual fund or company's stock, the basis for such earnings should be described in a footnote (as in some years this may be a negative number). Again, our reasoning is that these funds are compensatory.

ii. Increase in Pension Value

• Is the aggregate increase in accrued actuarial value the best measure for disclosing annual compensation earned under defined benefit and actuarial plans? If not, why? What other method should be used?

We believe that the aggregate increase in accrued actuarial value should not be included in the All Other Compensation column or, at a minimum, should be excluded from total compensation for purposes of determining named executive officers. Increases in actuarial value are a poor measure of compensation for a number of reasons, and inclusion of these numbers is likely to distort disclosure of actual compensation delivered rather than improve it, and to distort proper identification of the named executive officers.

For example:

• Actuarial values are likely to decrease in some years and increase in others, depending more on prevailing interest rates than changes in the underlying benefit payable. Reversals of interest rate trends could produce a large actuarial increase or decrease in a year when there was little or no change in the underlying benefit payable. At a minimum, the regulations should exclude actuarial increases in previously earned benefits relating to interest rate movement, or should allow offsetting decreases to be reflected in later years.
  
  
• Employee tenure is a key driver in determining the size of a pension accrual under most defined benefit plans. We believe it would be an unintended consequence for an executive's tenure to be an important driver in determining whether he or she is a named executive officer. At a minimum, any portion of the executive's accrual relating to more than the current year of service should be excluded.
  
  
• Age or, more accurately, the number of years until payment of the benefit is projected to commence is also an important factor in determining actuarial value. Two executives with identical benefits could have very different actuarial values based on differences in their ages or proximity to retirement. As a result, the determination of who is a named executive officer could be driven by the age of the candidates, rather than compensation decisions made with respect to them.
  
  
• Actuarial valuations are based on statistical trends and are presumed to be effective for measuring pension liability with respect to large groups of people. However, because they are based on statistical assumptions, they can be grossly erroneous when applied to an individual. To look at the extreme, for example, an actuarial valuation may predict that, based on an individual's projected retirement age, life span, etc., his or her annuity benefit has a value of millions, but if that individual dies before retirement, the annuity could yield nothing. Few investors will have the sophistication to appreciate how distorted these statistical predictions can be when applied to an individual.

In short, actuarial values are not a good measure of individual compensation being delivered because they are not designed to measure individual compensation and are too heavily impacted by factors, such as age and interest rates, that are not related to compensation decisions. We believe the supplemental Retirement Plan Table, disclosing annual pension benefits, provides a better, less distorted measure of the compensation being delivered and should be sufficient disclosure. Indeed, inclusion of both items provides duplicate disclosure that will be confusing to the average investor. The further inclusion of defined benefit plan payments in the All Other Compensation column causes triplicate disclosure in any year benefits are paid.

Furthermore, the determination of the actuarial increase in benefits during the most recent fiscal year is not a calculation that registrants normally determine. Without standardized actuarial assumptions and rules as to whether to take into account offsets for social security or other plan design offsets or whether for reporting purposes to categorize a cash balance pension plan as a defined benefit plan or a defined contribution plan, there will be large variance from company to company as to what is reported.

iii. Perquisites and Other Personal Benefits

• Should all perquisites be required to be separately identified when the $10,000 aggregate threshold is exceeded, as proposed?

No. We believe disclosure at that level is immaterial, and that the current rule that requires identification and quantification of each perquisite or other personal benefit exceeding 25% should be retained.

• Is the greater of $25,000 or 10% of the total amount of perquisites and personal benefits the proper minimum below which perquisites and personal benefits should not be required to be separately identified and their value reported? Should there be a lower minimum, such as $10,000, or no minimum? Should the current minimum of 25% of the total amount be retained?

We believe that the current rule that requires identification and quantification of each perquisite or other personal benefit exceeding 25% should be retained.

• We propose to retain the current standard for valuing perquisites and other personal benefits, based on the aggregate incremental cost to the company and its subsidiaries which has applied since 1983. We believe that this approach is consistent with the approach we are taking otherwise in valuing compensation, including in respect of share-based compensation. Nevertheless, we realize that there may be an issue whether the retail value of what is received by the executive officer, or director, rather than the aggregate incremental cost to the company, better measures the compensation provided by perquisites and other personal benefits. Therefore, we request comment as to whether we should require perquisites and other personal benefits to be valued based on the retail price of the item, or, if none, the retail price of a commercially available equivalent. In determining the commercially available equivalents, for example, for travel on the company's aircraft, the retail price of a commercially available equivalent would be the retail price to charter the same model aircraft. First-class airfare would not be considered equivalent to travel on a private aircraft.
  
  
• Would the proposed valuation standard facilitate Item 402 compliance while providing meaningful compensation disclosure? Is there any other valuation methodology that is preferable for valuing perquisites and other personal benefits? If so, why?

We agree that the use of incremental cost to value perquisites and personal benefits is the appropriate measure. We believe that the use of the retail price of a commercially available equivalent to value perquisites would be inconsistent with the approach taken by the Commission with respect to other aspects of compensation disclosure (e.g., the use of FAS 123R compensation cost to the company to value stock option awards). Perquisite valuation based upon the retail price would in most cases overstate the actual cost to the company of providing the perquisite and would, in some cases, raise difficult problems in application. For example, it is not possible to charter the type of aircraft that many companies use, so in those cases it will not be possible to obtain a retail price of a commercially available equivalent.

• Should Item 402 include a definition of perquisites or other personal benefits? If so, how should perquisites or other personal benefits be defined? How can we assure that new perquisites will not be developed in a manner intended to avoid the definition and therefore disclosure? If such a definition is principles-based, what principles in addition to those described in this release should be considered?

We do not believe that a bright-line definition of perquisites or other personal benefits is necessary, but request that the Commission provide additional or modified interpretive advice on the subject (see below).

• We are providing interpretive guidance above regarding perquisites and personal benefits. Are there any areas regarding perquisites and personal benefits where we should consider providing additional or different interpretive guidance? Should any of our interpretive guidance be codified?

In the release, the Commission indicates that an item is a perquisite if it confers a direct or indirect benefit that has a personal aspect, without regard to whether it may be provided for some business reason or for the convenience of the company. We believe that the Commission's interpretive position ignores the fact that items may have both a business aspect that is integrally and directly related to the business as well as a personal aspect. In those cases, we believe it is appropriate for the company to treat as a perquisite only the portion of the benefit that is personal. For example, for club memberships used primarily for business but also for incidental personal purposes, we believe the incremental cost of the personal use (such as personal meals and greens fees for personal golf rounds) should be disclosed as a perquisite.

Also, consistent with the current rules, we believe that relocation expenses incurred under a non-discriminatory relocation plan should not be considered perquisites as they clearly are business expenses and are exempted by being "generally available on a non-discriminatory basis to all employees". Those who receive relocation expenses from a company relocate as a condition of employment and because of the business need that they be located in proximity to the work site. We are not aware of companies paying relocation expenses when an executive moves for his or her own personal reasons.

Further, we request that the Commission reconsider its guidance that security provided during personal travel or at a personal residence always be considered a perquisite. In some cases, especially for multinational companies with locations in areas prone to kidnappings and other serious safety threats, the security risks to the executive officer are highest when away from the office on business or personal time. We suggest the final rule allow the company to determine whether personal security is a perquisite. In those cases where a company concludes it is not a perquisite, a reasonable requirement would be footnote disclosure that security is provided and is not considered a perquisite, with the rationale for the company's determination.

3. Narrative Disclosure to Summary Compensation Table and Supplemental Tables

• Would the proposed disclosure of up to three employees who are not executive officers but earn more in total compensation than any of the named executive officers be appropriate in the narrative discussion? Should more disclosure be required regarding these employees and their compensation? Is this information material to investors? Will disclosure of this information, particularly in the case of smaller companies, cause competitive harm? Is disclosure of this information consistent with the overall goals of this proposal?

We strongly urge the Commission not to adopt any requirement to disclose compensation of any person who is not an executive officer of the registrant because the competitive harm this type of disclosure will cause to companies heavily reliant on human capital — such as the financial services, technology and entertainment companies — will far outweigh any perceived benefit from providing this information. As examples, entertainment companies may be forced to disclose information about compensation of celebrities, such as television hosts, which is not useful information to shareholders and could put the company at a disadvantage in future negotiations; technology companies may be forced to disclose information about compensation of highly paid engineers or marketing executives, which would expose them to job offers from competitors while providing information of no value to shareholders in making voting decisions; and financial services companies may be forced to disclose sensitive information about highly compensated asset managers, which would likely cause competitive harm in retaining such individuals while providing little useful information to shareholders. Providing the job functions of these employees will not ensure anonymity at all. This is a significant concern because certain highly-paid employees in these industries are often a source of significant revenues for companies that employ them.

Important to our analysis is that these employees do not fit the Rule 3b-7 definition of executive officer. Requiring companies to cite the compensation and job descriptions of these employees in a proxy statement will highlight the value of these employees and simplify the task of identifying these key employees or, where the identify is known, providing a road map to the compensation necessary to woo them to a new employer, thus enabling competitors to hire these employees away. Often the loss of a single key producer can provide significant financial harm to an area of business and present a real risk for companies. On the other hand, concerns shareholders may have about excessive pay for these types of employees would be misplaced because compensation for employees in this category — such as entertainers, scientists, or salespeople — is almost completely market driven. Thus, we believe that the competitive harm and invasion of privacy of the individual employees far outweigh any possible benefit to shareholders.

If the concern that prompted the addition of this proposal is a worry that some companies might not properly designate executive officers and thus avoid disclosure of compensation of officers that properly should be designated as named executive officers, we believe this issue should be addressed head on, through enforcement if necessary, rather than indirectly.

Society Updates: Chapters, Committees and Membership Campaign Awards

Chapter Fall Conferences

Corporate Practices Committee

This committee met by teleconference on February 28th of this year and will next meet at the National Conference.

Work is proceeding on several reports and monographs:

• Lead Directors: Iris Aberbach is heading up this effort, and her team at Fannie Mae has finished a draft. It will probably be finished early in Summer.
  
  
• Minutes: Dennis Codon has finished reviewing from a legal/litigation viewpoint (how minutes can be used for and against us), and Bob Lamm will give it a final polish.
  
  
• Board Practices: Nicole Silsby's team has finished a draft. Geoff Loftus in the National Office will give it a final revision, and it should be available by early Summer.
  
  
• D&O Questionnaire: Craig Mallick, Cathy Hardwick and Andrew Tebbe revised this - mostly minor changes. This will need to be reviewed again in the fall if/when the SEC finalizes its compensation-disclosure rules.
  
  
• Compensation Survey Report: The National Office has updated the survey - an online version - and invitations to the members to take the survey will be out in July. The report will probably be ready this Autumn.

Securities Law Committee

• Comment letter on executive and director compensation disclosure and related matters filed by the April 10 deadline. A number of Society members made very significant contributions to the drafting effort. The entire, 51-page letter is available in PDF on the Society's website.
  
  
• PCAOB Subcommittee, led by Stacey Geer, provided the PCAOB Board with a letter containing information responsive to their inquiries, such as desired amendments to AS 2.
  
  
• Committee meeting and annual spring meeting with the SEC is scheduled for June 8th in D.C.

The committee will hold a meeting the National Conference.

Public Company Affairs Committee

PCA is working on a panel discussion at the National Conference on corporate governance rating services, and the first meeting of the PCA subcommittee on that topic will also be scheduled for a time during the Conference. Panel members will include Pat McGurn of ISS, Rob McCormick of Glass Lewis, Ed Durkin of the Carpenters Union and Shirley Westcott, managing director of policy at PROXY Governance. The Panel is entitled "The Increasing Role & Influence of Rating Agencies: How to Deal with Them" scheduled for Thursday, June 29th from 11:15 a.m. - 12:30 p.m. Committee Chariman Cary Klafter will moderate.

The committee will hold a meeting at the National Conference.

2005 — 2006 MEMBERSHIP CAMPAIGN AWARDS

Current Society members continue to be an important part of the campaign efforts by recommending new members — 163 members recommended 205 new members during the campaign, which ended March 31.

The top recruiter among members from non-vendor companies was Lydia Beebe, Secretary of Chevron Corporation in San Ramon, California, who recommended five new members. The top recruiter among members from vendor companies was Carolyn Coffey, Corporate Compliance Consultant with Corporation Service Company in Denver, who recommended eight new members. Congratulations to Lydia who won registration, hotel and travel to a regional fall conference of her choice, and to Carolyn who won $1,000!

The campaign prize drawing was held recently at the National Office; a recruiting member's name was entered for each new member recommended. The winner was Anne M. Ziebell, Corporate Paralegal at Medtronic, Inc. in Minneapolis and the prize is registration, airfare and room at the 60th National Conference in Philadelphia.

Finally the two campaign prizes for chapters have been determined. The $1,000 Chapter Recruitment Prize goes to the Los Angeles Chapter. The $1,000 Chapter Retention Prize goes to the Ohio Chapter.

Thank you all for your part in this year's campaign!

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. Inquiries regarding membership or publication orders should be addressed to:

Society of Corporate Secretaries and Governance Professionals
521 Fifth Avenue New York NY 10175
212-681-2000 - Fax 212-681-2005

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