Number 3-97
September-October 1997

• Shareholder proposal changes pose tough compromises
• From the Chairman
• "Experts" discuss option transferability
• Issues Update '97 - from poison pills to proxy fees
• Society sponsors second forum on the proxy process
• Membership recruiters can earn valuable prizes
• SEC simplifies disclosure, amends EDGAR rules
• What do directors need to know - and when?
• The 51st National Conference in pictures and words
• Heard at the National Conference in Boston...
• Roundtable issues corporate governance "white paper"
• "Top 10" records management principles and pointers
• A few facts about Board meeting dates
• Commentary - Internet web sites pose potential securities law liability
• Promotions and New Positions

Shareholder proposal changes pose tough compromises

[There is a 60-day comment period that commenced with publication of the release and ends on November 25. A subcommittee of the Society's Securities Law Committee intends to file detailed comments on the release. That subcommittee, headed by Gwenn Carr of ITT Industries, Inc., would welcome input from members of the ASCS and urges companies to address their own comments directly to the SEC. "The Commissioners are very desirous of hearing from the corporate community," Carr noted, "and the proponents undoubtedly will make their views known."]

[The release is available from the SEC Internet website - the Society has provided a quick link in the "What's New" area of the ASCS home page at www.ascs.org - or members can order a copy via the Society's Fax-on-Demand system or by calling Blanca Rosbach at (212) 681-2010. Please note that members can save 50% on fax charges by using Fax-on-Demand.]

Issuance of the release follows a comprehensive study of the shareholder proposal process carried out by the Commission staff. A key component of that study was a questionnaire that the Society helped distribute to members earlier in the year. Discussing questionnaire responses in the introduction to the release, the SEC notes that most respondents would prefer that the current system be maintained, with possible modifications. Respondents also supported the continued involvement of the Commission in the proposal process.

Here is a quick overview of the compromise elements included in the new release:

Addressing concerns expressed previously by the Society and other corporate groups, the Commission has proposed (1) raising voting percentage thresholds for resubmission of proposals (from 3/6/10 percent to 6/15/30 percent); (2) providing a clearer, more predictable framework for management's ability to exercise discretionary voting authority when a shareholder notifies the company that it intends to present a proposal outside the mechanism of Rule 14a-8 (i.e., when the proponent uses a 14a-4 "runaround"); and (3) streamlining the exclusion for certain types of "frivolous" proposals.

To balance those changes and answer concerns of proponents, the Commission has proposed (1) reversing Cracker Barrel to permit inclusion of employment-related proposals that raise significant social issues; (2) enabling shareholders to override the "relevance" and "ordinary business" exclusions of paragraphs Rule 14a-8(c)(5) and (c)(7) if three percent or more of the issuer's shareholders support inclusion of the proposal; and (3) modifying the relevance exclusion to include an objective test for determining which proposals would be economically insignificant to a particular issuer.

The most significant changes proposed for Rule 14a-8 are to paragraphs (c)(4) (the "personal grievance" exclusion); (c)(5) (the "relevance" exclusion); (c)(7) (the "ordinary business exclusion"); and (c)(12) (the "resubmission thresholds").

Rule 14a-8(c)(4) would be modified so that the staff would concur in the exclusion of a proposal on this ground only if the proposal (including any supporting statement) on its face relates to a personal grievance or interest. Any "neutral" proposal a company seeks to exclude under paragraph (c)(4) would receive a "no view" response from the staff. If the company chose to exclude the proposal anyway, it would do so under risk of potential litigation from the proponent.

Rule 14a-8(c)(5) would be narrowed and clarified in order to provide more predictable criteria for excluding proposals. The rule currently permits companies to exclude a proposal which relates to operations which account for less than five percent of the registrant's total assets at the end of its most recent fiscal year and for less than five percent of its net earnings and gross sales for its most recent fiscal year, if the proposal is not otherwise significantly related to the registrant's business. This final exception has led the rule often to be subjectively applied. As revised, the rule would apply a purely economic standard: A company would be permitted to exclude proposals relating to matters involving the purchase or sale of services or products that represent $10 million or less in gross revenue or total costs, whichever is appropriate. However, a lower threshold would apply if 3% of the company's gross revenue or total assets (whichever is higher), for its most recently completed fiscal year, is less than $10 million.

Rule 14a-8(c)(7) would be revised primarily with the reversal of the staff's Cracker Barrel interpretation and the addition of examples of proposals that would be excludable under "ordinary business" grounds because they relate to specific business decisions normally left to the discretion of management - e.g., the way a newspaper formats its stock tables, the wages a company pays its non-executive employees, the way a company operates its dividend reinvestment plan, etc. However, proposals relating to ordinary business matters but focusing on significant social policy issues would not be considered to be excludable, "because such issues typically fall outside the scope of management's prerogative."

The revised rule makes it clear that the Commission staff would continue to make judgments on (c)(7) exclusion requests on a case-by-case basis (even those related to employment).

"Override" - While maintaining both modified paragraphs (c)(5) and (c)(7) as grounds for exclusion, the Commission did provide a mechanism by which proponents can override a staff no-action decision on either grounds by demonstrating that at least three percent of the company's outstanding voting shares support submission of the proposal for a shareholder vote.

As proposed, a proponent wishing to take advantage of the override would be responsible for demonstrating to the company, not less than 120 days before the date the company released its proxy statement to shareholders the prior year, that its proposal had received endorsement by the holders of three percent of the company's shares entitled to be voted on the proposal at the meeting. A supporter could endorse only one proposal per company during a proxy season but could still introduce its own proposal for the meeting. In determining the number of shares needed for endorsement, the proponent could rely on the number of voting shares outstanding reported in the company's annual report for the prior year's annual meeting.

Rule 14a-8(c)(12) would be revised to raise resubmission thresholds to 6-15-30 percent, as noted above, though the release does ask for comment on several alternative suggestions: e.g., whether the size of the thresholds should vary in inverse relationship to the size of the company or whether the first year resubmission threshold should be retained at 3% while the second and third year levels would be raised to 15% and 30%. In all cases the vote percentages would be based on a "votes cast" standard, excluding abstentions and broker non-votes.

In addition to the proposed changes to Rule 14a-8, the Commission also offered a compromise solution to the problem of discretionary voting authority in connection with proposals brought up directly at an annual meeting under provisions of Rule 14a-4 rather than via the 14a-8 process. The proposed new rule would replace the Idaho Power no-action decision offered before the 1997 proxy season.

Under revised Rule 14a-4(c)(1), a company could maintain voting discretion where "the registrant did not have notice of the matter more than 45 days before the date on which the registrant mailed its proxy materials for the prior year's annual meeting" (or sooner, if the company has an advanced notice by-law requiring more than 45 days notice). Another rule would require a company to disclose the date after which such 14a-4 proposals would be considered untimely under paragraph (c)(1).

A new paragraph 14a-4(c)(2) is also proposed outlining how a company can exercise discretionary voting authority on non-14a-8 proposals received with timely notice. The process must be followed, even if the proponents do not indicate an intention to solicit proxies on their own (as Idaho Power required). The company would be required to include in its proxy statement a discussion of any such proposals and how the company intends to exercise its discretion on them and to include on its proxy card both a cross-reference to the discussion of the matters in the proxy statement and a box allowing shareholders to withhold discretionary voting authority from management to vote on the same matter(s). Only one box would be necessary even if several proposals may be introduced at the meeting.

The release includes a few other rule modifications addressing such issues as ownership qualifications for submitting proposals and qualification for presenting a proposal at an annual meeting.

Brian Lane, Director of the SEC's Division of Corporation Finance will discuss the new shareholder proposal rules and other current and future rulemaking initiatives of the Commission during the Society's Issues Update seminar, November 17-18 at the Plaza Hotel in New York. For information about the seminar consult the Society's Internet website or contact Harriet Chabrowe at the National Office (212) 681-2009. The Society has worked closely with the SEC as the Commission has been working to reform the shareholder proposal process. For example, the ASCS:

• offered a forum to Commissioner Steven Wallman to outline his proposals that started the reform process moving ahead;
• distributed copies of the SEC questionnaire to all public companies represented in the membership, provided a direct link to the questionnaire on its website and encouraged members to complete the survey;
• responded to staff requests for specific information on the costs companies incur in working through the no-action process (the release notes a per company average of $36,603 and a median cost of $10,000) or printing shareholder proposals in their proxy statements (the release notes a per company average of $49,563 with a median cost of $10,000);
• met with Commissioner Norman Johnson at his request to review issues involved in the proposal process.

FROM THE CHAIRMAN

Assuming the Society chairmanship is both an honor and a responsibility. The honor is clear - being selected to lead an organization of professional colleagues and good friends. The responsibility, which is more complex, involves establishing goals and undertaking projects designed to help the Society grow this year and be even stronger in the future.

Meeting for the first time in July at the National Conference in Boston, the new ASCS board began to focus on what it hopes to accomplish this year. Since the Society is an organization with special expertise on how boards and their committees get things done, we decided to look closely at our own board and committee structure to see if they could use some "fine tuning." As a first step, all national committee chairmen have agreed to develop or refine existing mission statements and to share these with their own members and with the board. The committees play key roles in the Society's networking, education and advocacy efforts, and they enable a large number of members to make an active professional contribution. We expect this review of their goals and structure to enable the committees to be even more effective and valuable in the future. The process has already led to one significant change. The board voted to broaden the role of the former Budget Committee and has renamed it the Finance Committee with added responsibility for overseeing our investment policies.

The board also plans to study its own structure and function. Is it the right size? Do agendas need refining? Is there a good working relationship between our local and national levels? These are just a few issues the board will be exploring in the months ahead.

We have also begun to focus on a concept to tie together many of this year's activities and to serve as an underlying theme for the 1998 National Conference, June 24-28 at the Hotel Del Coronado in San Diego. The theme involves the special role that corporate secretaries play in facilitating communication within the boardroom and among directors, management and shareholders. Successful corporate secretaries have a unique talent for keeping information flowing smoothly and accurately and clearing up any bottlenecks to good communication among corporate leaders. What are the "trade secrets" behind this talent? Look for discussion of these secrets in upcoming newsletters.

I left our National Conference in Boston with the feeling that it was one of the best ever, and comments and evaluations received by the National Office echo my impression. Much of the credit goes to National Conference Chairman Nick Calise who made sure that everything - including the weather - was perfect. Nick worked closely with Sig Ueland and the National Office staff and delivered a program strong on learning and high on enjoyment. Together, Sig and Nick raised the bar, setting a high standard for quality Society meetings. We remain indebted to them for their leadership.

The National Conference marks only the beginning of a year of important and valuable Society programs - regional fall conferences, local meetings, national seminars, teleconferences, and more. I hope to see many of you at programs throughout the year and welcome your suggestions on ways the Society can serve you.

"Experts" discuss option transferability

Option transferability has become of interest to many Society members and their companies since the Section 16 rules were revised in 1996. Speaking from their offices, Society members Gerald Burger from Browning-Ferris Industries, Inc. in Houston, Thomas Klee of Shipman & Goodwin in Hartford, and Sandra Lambert of Thermo Electron Corporation in Waltham, MA joined Stewart Reifler of Weil, Gotshal & Manges in New York and Peter Elinsky and Carol Warley of KPMG Peat Marwick to discuss estate, tax and securities law issues companies must consider in deciding whether to modify existing option plans to permit transferability and to explain the logistics for changing plans.

Thanks to a generous grant from Philip Morris Companies, Inc. that helped offset set-up charges for the teleconference, the only cost to those who listened in and then queued up to ask questions was their long distance charges to connect to the call.

The Society intends to conduct several more "Experts on the Line" calls throughout the year and welcomes members' suggestions for topics.

Issues Update '97 - from poison pills to proxy fees

The faculty include Brian Lane from the SEC, Deputy Chancellor Jack Jacobs from the Delaware Chancery Court, corporate attorney Martin Lipton (the "father" of the poison pill), institutional investor leader Jon Lukomnik from the New York City Comptroller's Office, board recruitment specialist Abram Claude, plus several other governance and proxy process experts from both within and outside the Society. In addition, former SEC Chief Counsel Simon Lorne, now Managing Director of Salomon Brothers Inc., will deliver a luncheon address on the first day of the seminar.

Here are just a few of the questions that will come under focus during the two-day seminar:

• What strategies can companies develop for preserving anti-takeover devices, such as poison pills and staggered boards?
• What are some ways to involve the board in compliance-related matters and protect directors from potential liability in times of crisis?
• What are major findings of the NYSE audit of 1997 proxy fees, and what implications might these findings have on fees for the coming year?
• Does institutional activism really have an impact on the corporate bottom line?
• What can established companies learn about board recruitment and improvement from companies that have recently spun off new entities and formed new boards?

Capping off the seminar will be an "SEC Update" led by Brian Lane, Director of the Division of Corporation Finance, who will discuss the new 14a-8 proposals, disclosure rule changes, electronic communications and other SEC initiatives for 1998. The registration fee for members is $645. Non-member tuition is $745, and additional registrants from a corporation can attend for $400. Brochures containing full program and registration details for the seminar have recently been mailed out. It is also possible to register from the Society's Internet website at http://www.ascs.org. If you have questions about Issues Update or any Society seminar program, please contact Harriet Chabrowe in the National Office at (212) 681-2009.

Society sponsors second forum on the proxy process

As in June, a diverse group of invited panelists representing issuers, proxy and transfer agents, institutional and individual investors, brokerage firms and proxy distribution and tabulation firms will gather to focus on practical issues that will have an impact on the 1998 proxy season. The New York Stock Exchange is also scheduled to have completed its audit of 1997 proxy fees by the date of the forum, and NYSE representatives have been asked to share the results of the audit.

The forum will once again have a flexible agenda, though several of the issues brought out at the June session are certain to be revisited. Among these are: the problem of double-voting of borrowed stock; whether the 10-day rule is essential to assure meeting quorums; how the NYSE determines which issues are eligible for broker discretionary voting; what steps can be taken to enable shareholders to receive end-to-end confirmation of their votes; the current and future potential for voting via telephone and the Internet; ways to avoid delayed delivery of proxy materials; and the problems that late voting by institutions can cause.

The second forum will likely also focus on the shareholder proposal process as it may be changed under rule changes recently proposed by the SEC and new institutional investor issues that may have come to the fore since the June meeting. In addition, participants will focus on specific suggestions for keeping costs down while achieving greater efficiency in proxy delivery, collection and tabulation. Among those topics will be the advisability of using bulk mailing and ways to speed up the bulk delivery process and an update on corporate efforts to use the Internet and e-mail to distribute proxy materials to employee shareholders and record holders. Following the November meeting, the National Office will post a summary of the discussion on the Society Internet website and make copies available via e-mail and fax-on-demand system. For questions about the forum, contact Michael Goodman at the National Office at (212) 681-2013.

Membership recruiters can earn valuable prizes

While they enjoyed their success last year, ASCS Membership Committee Chairman Don Hager and the various chapter membership chairs are already revving up for the 1997-98 campaign. The campaign began September 1, and members who recruit colleagues to join the Society will once again be able to earn valuable vacation prizes.

A brochure describing the different prizes and rules for winning them - as well as tips for recruiting potential new members - is currently being mailed to members. There will be two levels of prizes. Three special prizes will be presented to the top three recruiters overall - vacation stays at Marriott's Desert Springs in Palm Desert, California; the St. Regis Hotel in New York; and the Mandarin Oriental in San Francisco, respectively. However, any member who brings even one new colleague into the Society can become the big winner. He or she will be entered in a drawing to win an outstanding vacation trip to The Homestead in Virginia's Shenandoah Valley. That prize includes both a hotel stay and round trip airfare.

Hager noted that earning prizes is not the only reason that members should be active recruiters for the Society. "A strong, growing Society benefits all members by energizing chapters and committees with new colleagues and new companies and by strengthening the impact of Society commentary to regulators such as the SEC and securities markets. In other words, by introducing the Society to potential new members, the Society becomes more valuable to each of us."

Approximately 3,000 potential members have already been mailed copies of the Society's 1997-98 membership brochure detailing the many benefits of belonging to the Society, accompanied by a letter from ASCS Chairman Carol Strickland. ASCS members are also being sent a copy of the new brochure, along with the campaign prize descriptions. The brochure contains a tear-off membership application with a box in which recruiters can write their names as "Campaign Sponsor." This will ensure that they get proper credit for their recruiting efforts and earn chances to win one of the prizes. Additional copies of the brochure are available from Bridget Wurzburg in the National Office (212-681-2014 or e-mail: bwurzbur@governanceprofessionals.org).

SEC simplfies disclosure, amends EDGAR rules

The principle actions contained in the release include:

• elimination of Form SR, the use of proceeds report for initial public offerings. That information can be included in '34 Act reports;
• amendment of Form 8-A, the short form registration statement used by reporting companies to register a class of securities, to permit automatic effectiveness of all such forms filed and to eliminate certain exhibit requirements;
• elimination of Form 8-B, concerning the registration of securities of successor issuers;
• exemption of ADR's listed on a national exchange and registered on Form F-6 from Section 12(b) registra-tion requirements (the underlying class of securities is not exempted);
• amendment of Rule 401(c) to permit an issuer to switch to a shorter '33 Act form at the time any amendment is filed, if the issuer has become eligible to use the shorter form; and
• automatic effectiveness of post-effective amendments to '33 Act registration statements filed solely to add exhibits.

The EDGAR amendments set forth in Release Nos. 33-7427, 34-38798 (issued July 1) add two new rules to Regulation S-T and eliminate three rules that governed the transition from the EDGAR pilot to the operational stage. The Society was one of only three commentators on the proposed rules issued early in the year.

The Commission decided to defer action on a new Form DF, which was proposed as a mechanism for registrants to indicate that a filing would be delayed because of unanticipated technical difficulties. The proposal may be reconsidered at a later date, but in the meanwhile the staff will continue to consider filing date adjustments on a case-by-case basis.

The SEC also decided for the time being not to codify in Rule 13 of Regulation S-T a staff interpretive letter that relates to the timing of filing proxy materials permitted to be "mailed for filing" with the SEC at the same time they are published, furnished, sent or given to security holders or others. The interpretive position will still be followed, however, allowing issuers and others to file electronically proxy materials promptly on the next business day following distribution to security holders where it is impracticable to file the materials on the same business day on which distribution first occurs.

What do directors need to know - and when?

When Sidney Taurel, President and Chief Operating Officer of Eli Lilly and Company, spoke during the final morning of the National Conference in Boston, he did more than set the tone for an exciting segment on corporate governance and the changing role of the board. He also anticipated the theme for next year's conference in San Diego - the key role the Corporate Secretary plays in keeping information flowing to and between management and the board - and provided personal insights on that subject.

Taurel focused most of his thoughtful and candid remarks on the history of governance at Lilly - from the early 1970s, when 15 of the company's 17 board seats were held by insiders, to the current situation, in which nine of 13 directors are outsiders who play an active role evaluating the CEO, advising on corporate strategy and planning for management succession. During the last five minutes, however, he switched gears somewhat to focus on what he has learned in a new role for himself as an outside director at two other companies. Excerpted below is Taurel's advice to Corporate Secretaries on how to keep information flowing to and from the boardroom [Taurel's complete address is available from Blanca Rosbach in the National Office]:

"As an outside board member who's fairly new to these responsibilities, I'm especially sensitive to your responsibilities for ensuring that board members - especially the outside, independent directors - have the information they need.

"On a day-to-day basis, you need to make sure that the flow of information is adequate and appropriate. Note that I said 'adequate and appropriate.' The volume...timing...and content all require judgment.

"Please resist the temptation to deluge us with documents aimed at satisfying some ill-defined notion of due diligence. I recall a letter from a well-known author that began, 'I'm sorry this is such a long letter, but I didn't have time to write you a short one.'

"As for content, outside directors not only need internal information - but also perhaps more importantly - outside perspective on the company and its business - analyst reports...peer group surveys...customer satisfaction surveys...and other external barometers.

"Timing is also important. In most cases, outside directors can only begin to focus on board business shortly before meetings. So, please don't send information piecemeal - unless it's time-sensitive. Instead, send it in a single well-organized package just before the meeting.

"Another point about timing: the primary axiom is that - if at all possible - outside directors should not be surprised by things like reports in the media, analyst reports or stock price fluctuations.

"In the long term, corporate secretaries play key roles in the orientation of board members, especially outside directors. By orientation, I'm primarily talking about facilitating a broad, deep understanding of the company's business and business environment.

"Also in the long-term category, corporate secretaries must assist CEOs in the task of ensuring that their companies' principles of corporate governance are followed - that companies 'walk the talk.' Of course, you can't nurture good governance without the full support of the CEO - and the entire board. But the secretary can vigorously champion strong implementation. Moreover, you can continually scan for new trends and advocate new opportunities for best practices.

"As we look ahead to the twenty-first century... the demands for corporate wisdom - for accessible, visionary, decisive corporate governance - will only continue to grow. The bar continues to go up, and up and up...."

The 51st National Conference in pictures and words

Former New York Governor Mario Cuomo set the right tone for the conference with an inspirational opening address.

ASCS Chairman Sig Ueland (right) presents the Bracebridge H. Young Distinguished Service Award to John Meagher. Meagher is a former national director, New York Chapter President and Securities Industry Committee Chairman..

Outgoing Society directors (l to r) Rod Nowland, Ivy Bernhardson, Don Connelly, John Meagher and Larry Menter were recognized at the Annual Meeting of Members.

One of the busiest venues of the conference was the Exhibition Hall, where 31 different vendors (the most ever) demonstrated products and services available to assist corporate secretaries in handling various tasks.

A lively panel of directors and board experts closed out the conference business program with outspoken views on "Successful Practices for Boards and Committees." From left are Elizabeth Bailey, Kevern Joyce, Charles King, Jay Lorsch and George Nigh.

National Conference Committee Chairman Nick Calise handles housekeeping details at the start of another busy day in Boston.

Heard at the National Conference in Boston...

Here are some of the comments, analyses and predictions that were offered on a wide variety of topics by speakers and panelists at the National Conference.

Board and governance issues

"The way you find out if a person is on too many boards is by his or her performance. Maybe one is too many for some directors."
George Nigh, director and former Governor of Oklahoma

"The companies that do individual director evaluation well are those that have staggered boards. Those not up for election can evaluate those who are. TIAA-CREF does the best evaluation job of the boards I sit on, and it has a staggered board."
Elizabeth Bailey, The Wharton School

"I think it's a waste of time to separate the Chairman and CEO positions. You don't want to create an 'us vs. them' mentality. A lead director doesn't seem to do the job either. Individual directors take a lead role in areas in which they have experience and expertise."
Kevern Joyce, Chairman and CEO, TNP Enterprises, Inc.

"Term limits is an appropriate idea, but 10 years is too small a limit to be effective. A director needs time to build understanding. That expertise takes about 10 years. Mozart was a prodigy at age 6, but his good music didn't come until he was past 16."
Elizabeth Bailey

"The outside directors, in particular, bring to the table a much different perspective from management - and raise critical issues. This is not micromanagement. This is a mutual education process that improves the quality of decision-making. Among other things, this process gives management the confidence to take significant risks - consistent with its strategy - without undue concern about being second guessed. And that confidence is absolutely critical to success in today's hypercompetitive, fast-changing, global markets."
Sidney Taurel, Eli Lilly and Company

Securities law and disclosure issues

"The trouble is people don't read what you write. They see the MD&A section of the annual report as grounds to sue you. So less is better..."
Kevern Joyce

"Most issuers now support the idea of plain English disclosure, with the exception of some underwriters and big law firms in New York. I'm willing to sit down with any underwriter who's balking at the idea of preparing a plain English summary for a prospectus."
Brian Lane, Director of Corporation Finance, SEC

Proxy voting issues

"We've looked at all of the studies on both sides [of the poison pill issue] and I think the answer is: we're not sure what the answer is. In general, we will vote for a poison pill that has a short term limit (five years or less) and after that either goes away or comes up for shareholder vote. We like 'chewable pills.'"
Robert Pozen, Fidelity Management and Research Company

"Our plans are to meet with up to 1500 companies individually this year. We will select specific corporations based on their corporate governance and we will talk to them about our specific concerns. If we feel a corporation is not being forthcoming or willing to discuss what we consider to be an issue of economic concern, we will initiate a shareholder resolution."
Albert Wilson, TIAA-CREF

"Public funds are basically running a political process, not an economic one. Because many of them are indexed, if they don't like what's going on, all they can do is harass you."
Jay Lorsch

Roundtable issues corporate governance "white paper"

The BRT Statement calls for a greater focus on the substance of corporate governance rather than form, cautioning against the universal application of rigid formal requirements that do not take into account the individual circumstances of particular companies. According to governance expert Martin Lipton, "[The document] rejects the formulaic approach of CalPERS and the box-checking approach of the NACD. Instead, it presents a rational, workable set of principles that may be endorsed by all public companies."

In addition to rejecting the "one approach fits all" philosophy, the white paper also notes that the following principles should underlie any governance discussion:

• The development of corporate governance should continue to evolve through voluntary action by the business community without new laws and regulations.
• The paramount duty of management and boards is to the corporation's stockholders.
• A wide diversity of approaches to corporate governance should be expected and is entirely appropriate.

In addition, The BRT's Statement offers a number of specific recommendations for good governance practices:

• A substantial majority of a corporation's directors should be outside directors.
• To assure that each director represents the interests of all stockholders, not the interests of any single individual or group, cumulative voting is generally not recommended.
• Membership in certain key committees - audit, compensation, nominating/governance - should be limited to outside directors.
• Board members should have full access to senior management and to information on the corporation's operations.
• Where outside directors have business relationships with the corporation or business or personal relationships with management, boards should make a judgment about a director's independence based on his or her individual circumstances rather than through the mechanical application of rigid criteria.
• Term limits for directors are generally not favored because they can deprive a corporation of its most experienced board members.
• Service on other boards broadens and deepens the knowledge and experience of directors. Because time demands and directors' capacities will vary, The Business Roundtable does not endorse a specific limitation on the number of directorships an individual may hold.
• No one mix of forms of compensation (cash, stock grants, options, etc.) will be right for all companies, but boards should consider some form of equity as a portion of each director's compensation.
• There should be an opportunity for the board to meet periodically outside the presence of the CEO and other inside directors.
• While each corporation should be free to make its own determination of the leadership structure that serves it best, most BRT members believe their corporations are generally well served by a structure in which the CEO also serves as chairman of the board.
• Where the positions of Chairman and CEO are unified, the board should have an understanding of how non-executive leadership of the board could be provided if necessary.
• Management succession plans should be reviewed periodically by the board.

As for shareholder meetings, the BRT recommends that the proxy statement and annual meeting focus "only matters of significance to the business of the corporation and to stockholders as a whole" rather than on political and social issues, personal grievances and "ordinary business." The BRT also suggests that companies put advance notice requirements in their bylaws and adopt adequate measures to assure the integrity, accuracy and timeliness of the voting tabulation process.

Discussing the white paper in a recent newsletter, the Council of Institutional Investors notes that while the BRT doesn't endorse separating the chairman and CEO, establishing term limits, setting a cap on the number of boards a director may serve on, or establishing a lead director, it doesn't condemn those ideas either. "The fact that these issues are raised and discussed in some detail shows how far the corporate governance debate has moved in the last few years. The BRT's 1990 governance document didn't even mention those concepts."

Members interested in obtaining copies of the BRT Statement on Corporate Governance can fax a request to Carole Furtado at (202) 466-3509. Please include your phone number in case supplies are low and there is a problem in filling your request. Copies will also be available at various Society fall conferences. The document is also be posted on The Business Rountable's web site at www.brtable.org.

"Top 10" records management principles and pointers

10. Get top management backing or you'll get nowhere fast. Don't wait until there's a major litigation loss, Hart-Scott-Rodino document production problem or other catastrophe. Explain how records management ties in with quality and efficiency and is cost effective over the long term.

9. Organize records by workgroup, and get them out of individuals' offices. Company records should not be individually maintained in desk drawers, credenzas, closets or the like. "Central" records allow information to be shared among those who need it. It avoids duplication and wasted time. Records needed in individuals' offices can be authorized by the workgroup manager when business needs or security require it, but bias must be towards sharing information with those authorized to access it.

8. Index the records in your workgroup so you can find them readily. Include those in the workgroup's "central" files as well as any authorized for storage in individuals' offices. Use a fancy software index if it fits your budget and needs. There are some good ones available.

7. Designate only one workgroup as the keeper of the "retention" copy of each category of files. The keeper of the "retention" copy will retain it for the full official retention period specified in the retention schedule. Every other workgroup that has a copy of those files will have a "convenience" copy, which will have a shorter useful life.

6. The "retention" copy of a file generally can be maintained on either paper or electronic media. Decide which you want to use based on technological proficiency of your staff, cost, special regulatory requirements and other factors. Once the "retention" copy keeper has decided which medium to use for maintaining that copy, all others, on any media, are "convenience" copies, with shorter useful lives.

5. Assign a "Sunset Date" (date specified for complete destruction of the "retention" copy) to every file from the day it is created. Avoid building up stacks of files with no Sunset Dates and no one willing to slug through them to figure out if they are needed any longer. Develop a retention schedule and use it from the outset.

4. Be sure each file has a designated responsible employee (the "Owner") who has authority and responsibility for the organization and content of each file. When the Owner moves on, assign a replacement immediately. Don't let files build up with workgroup employees feeling they have no specific responsibilities for the files.

3. Never forget security! Set guidelines for access, secure transmission and destruction of records. Discourage needless copying of sensitive materials. Know what's at employees' homes and on laptops, and set controls.

2. GOLDEN RULE OF RETENTION: Save only materials that are important and relevant to a matter. Generally, files should be organized by discrete "matters" which track the functions of the particular workgroup. If an item is not both relevant and important to a matter, then throw it out. This rule eliminates extra copies, phone message slips, most drafts and tons of other irrelevant and unimportant "stuff" that builds up in files.

1a. Recognize that the evolution of the media of records storage from paper to electronic is the most important factor affecting the field of records management today. All types of records on electronic media have to be dealt with in your records management practices. So what should we do? Generally, you follow the same principles as with paper. Also, recognize that most files stored on paper today will be converted to electronic media within 5 to 20 years. Anticipate this, and if you can foresee that conversion for your records within 5 years, be sure any new paper records management system can evolve to handle electronic records.

1. After you have the backing of top management and have a records management system and retention schedule in place, the single most important records management practice is an annual file "clean up" day. Keep everyone's attention on the importance of records management with periodic reminders, notes in the employee paper, tips for good management, is excellent. But picking a date dedicated to getting rid of the old junk does the best job of focusing everyone on the issue.

A few facts about Board meeting dates

1. How frequently do boards meet?
monthly 10%
bi-monthly 10%
quarterly 36%
other 45%

2. Has that number of meetings changed over previous years?
38 companies indicated a change, 30 reduced the number of meetings per year and eight increased it.

3. Which week of the month is the most popular for meetings?
Third week, followed by fourth, second, first, and last (more than 25% indicated no set week).

4. Which days of the week are the most favored for meetings?
Thursday, followed by Tuesday, Wednesday, Friday (more than 30% indicated no set day).

Internet web sites pose potential securities law liability

by Geoffrey D. Fallon

In keeping up with the ever-increasing demands of investors for information, many companies have established Internet web sites. While a web site provides convenient access to interested investors and undoubtedly helps achieve corporate investor relations goals, the Internet may also be a mine-field for securities law liability. Indeed, given the wealth of information often found on a company's web site, it may provide "one-stop shopping" for plaintiff's attorneys looking to file a shareholder class action alleging securities law disclosure violations.

Nearly all 1996 annual reports refer to company web sites, and many sites contain detailed financial information. One company in its 1996 Annual Report noted that there was no longer a need for interim reports because the financial information ordinarily found in the quarterlies may be found on its web site. The company added that its site also contains financial press releases, corporate updates, and general business information.

SEC and corporate web sites

Looking toward the future, the SEC stated that: "Given the numerous benefits of electronic media, the Commission encourages further technological research, development and application. The Commission believes that the use of electronic media should be at least an equal alternative to the use of paper-based media.

Despite this enthusiastic endorsement of the Internet, SEC surveillance personnel routinely "surf the net" for securities violations, and the SEC has established liaisons with other agencies, including the NYSE, to police the net.

Analyst Reports

Besides the potential problems of posting analyst reports during a securities offering, posting such reports may provide plaintiffs with other arguments. In shareholder class actions plaintiffs routinely allege that a company adopted as its own the information and/or projections contained in an analyst's report, yet failed to meet or correct the projections.

When a company adopts an analyst's projection and/or the information underlying the projection, the company assumes the duty to update the projection or information so as not to mislead investors. Failure to so update may be a securities law violation resulting in liability to shareholders, and little protection is offered by the "safe harbor" for forward-looking statements under the Private Securities Litigation Reform Act of 1995. Accordingly, a creative plaintiff's attorney's "adoption of the analyst report" argument may be strengthened by arguing that the company took the initiative to post the analyst report on its web site, or that the company set up its web site to provide a hyperlink to a broker's web site where the report appears.

Another problem with posting or hyperlinking analyst reports is potentially misleading investors by posting only favorable reports. Such a practice could strengthen a plaintiff's argument that a company has adopted as its own the posted analyst reports because it has selectively chosen the reports to post. This argument may be blunted by posting all analyst reports regardless of their viewpoint on the company or its prospects for the future.

Marketing Material on Sites

"Electronically delivered documents must be prepared, updated, and delivered consistent with the provisions of the federal securities laws in the same manner as paper documents. Regardless of whether information is delivered through paper or electronic means, it should, of course, convey all material and required information."

The SEC's position on required disclosures appears simple and consistent with well-known disclosure rules. Nonetheless, it is a message too few corporate directors will hear amid the din of Internet drum beating.

Promotions and New Positions

• Debra A. Baker, now Senior Vice President as well as Secretary, UST Inc.
• Karl R. Barnickol, now Senior Vice President, Secretary and General Counsel with Solutia, Inc., St. Louis, MO
• Marilynn D. Bersoff, now Senior Vice President as well as Secretary, BTG, Inc.
• Michael Blaney, now Vice President-Sales with Packard Press Corporation, NY, NY
• O. Kay Comendul, now Assistant Secretary with Northeast Utilities, Berlin, CT
• Donald F. Crane, Jr., now Vice President, General Counsel and Secretary with Cytogen Corporation, Princeton, NJ
• Donna L. Currens, now Manager, Stock Plans Administration as well as Assistant Secretary, The Reynolds and Reynolds Company
• Sidney F. Davis, now Of Counsel with Kelly, Price, Passidomo & Siket, Naples, FL
• Patty M. DeGaetano, now Senior Paralegal, Dura Pharmaceuticals Inc.
• Denis A. Demblowski, now Secretary as well as Senior Counsel, Aluminum Company of America
• Margaret M. Foran, now Senior Corporate Counsel and Assistant Secretary with Pfizer, Inc., New York, NY
• Michael G. Fortado, now Vice President, General Counsel and Secretary with Trinity Industries, Inc., Dallas, TX
• Jean F. Geisel, now Secretary, Bausch & Lomb Incorporated
• Kathleen M. Gibson, now Secretary as well as Vice President, Honeywell Inc.
• Randall J. Gort, now Vice President, General Counsel and Secretary with WorldGate Communications, Inc., Bensalem, PA
• C. Russel Hansen, Jr., now Chief Operating Officer with National Association of Corporate Directors, Washington, DC
• Paul W. Hartloff, Jr., now Partner, with Jarvis, Hartloff & Simon LLP, Santa Barbara, CA
• Bridget M. Healy, now Vice President, Secretary and Associate General Counsel, Becton, Dickinson and Company
• Stephen A. Hellrung, now Senior Vice President, General Counsel and Secretary with The Pillsbury Company, Minneapolis, MN
• Thomas G. Kies, now Senior Vice President with Shareholder Communication Corporation, New York, NY
• Karen L. Knopf, now Corporate Counsel and Assistant Secretary with Solutia Inc., St. Louis, MO
• Richard F. Kotz, now Member with Dykema Gossett, Chicago, IL
• Theresa K. Lee, now Vice President, Associate General Counsel and Secretary, Eastman Chemical Company
• Howard Malovany, now Senior Counsel as well as Assistant Secretary, Wm. Wrigley Jr. Company
• Peter L. McCorkell, now Senior Vice President as well as General Counsel and Secretary, Fair, Isaac and Company, Incorporated
• Mary M. McLemore, now Director, Office of the Secretary, with ChoicePoint Inc. Alpharetta, GA
• Esther S. Ondrack, now Senior Vice President as well as Secretary, Chieftain International, Inc.
• Venrice R. Palmer, now Senior Counsel with BankAmerica Corporation, San Francisco, CA
• Betty J. Pecha, now Manager-Corporate Compliance as well as Assistant Secretary, The FINOVA Group Inc.
• Karen K. Pederson, now Legal Administrator and Paralegal with Dr Pepper/Seven Up, Inc., Dallas, TX
• Susan Reynolds, now Senior Vice President-Human Resources, Cognizant Corporation
• Cathy R. Sams, now Secretary as well as Senior Counsel, Imation Corp.
• Brenda A. Sanders, now Assistant Secretary with Pillowtex Corporation, Dallas, TX
• Gloria Santona, now Deputy General Counsel as well as Vice President and Secretary, McDonald's Corporation
• Donald J. Sprenger, now Vice President, Key Trust Company of Ohio National Association, Highland Heights, OH
• Hugh J. Stedman, now Senior Vice President as well as General Counsel and Secretary, Cerulean Companies, Inc.
• Richard J. Strobel, now Executive Vice President with Computer Clinic, Inc., Valhalla, NY
• Doris K. Tuura, now Senior Attorney with Dorsey & Whitney, L.L.P., Minneapolis, MN
• Susan E. Wolf, now Of Counsel with Irell & Manella, Los Angles, CA
• Martha Brown Wyrsch, now General Counsel as well as Vice President and Secretary, K N Energy

The Corporate Secretary is published throughout the year as a service to members of the Society of Corporate Secretaries and Governance Professionals. Articles or statements appearing herein do not constitute legal opinion, advice or judgment and should not be relied upon as such. Inquiries regarding information contained in this newsletter should be directed to Geoff Loftus, at (212) 681-2000 or by e-mail: gloftus@governanceprofessionals.org. Inquiries regarding membership or publication orders should be addressed to:

Membership               Publications
Deborah Fox              Olga Holmes
(212) 681-2014           (212) 681-2015

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