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 Number 1-98
Shareholder proposal reform meets strong oppositionLarge-scale reforms in the shareholder proposal process, such as those proposed by the Securities and Exchange Commission in October, seem unlikely to come about any time soon. That's a conclusion shared by both corporate and investor groups following the comment period for the SEC's proposed changes to Rule 14a-8 presented in Release No. 34-39093. From the outset it was clear that the success of the SEC's latest effort to reform the process would be dependent on the willingness of both shareholders and issuers to compromise on changes to the current rules, but neither side has been able to agree on acceptable changes. Even some "behind the scenes" negotiations, in which the ASCS took part, proved unsuccessful in bringing different sides closer together.What may emerge from the discussions and letter writing campaign is a much less dramatic compromise in which the SEC's "Cracker Barrel" ruling on employment-related proposals will be reversed, starting with the 1999 proxy season, and the rules related to submission of proposals under Rule 14a-4 and the ability of companies to use discretionary voting authority on such proposals will be clarified. Those were the only two changes from the current system proposed in a letter to the Commission from Columbia law professor Harvey Goldschmid and attorney Ira Millstein. At the request of SEC Chairman Arthur Levitt, Goldschmid and Millstein had met with representatives of corporate and investor groups - including the ASCS - in an effort to hammer out a more extensive reform package. The two attorneys soon determined that repeal of Cracker Barrel and changes to Rule 14a-4 were the only changes that "will be received favorably - or at least without opposition - in the broadest segments of the business and proponent communities." The key sticking points in the proposed reforms for institutional groups involved the raising of resubmission thresholds, a proposed hands-off approach by the Commission staff on omitting a proposal on personal grievance grounds, and changes to the relevance test under 14a-8(c)(5). For corporate groups, the major drawbacks in the SEC package involved a proposed shareholder override of a staff opinion permitting a company to omit a proposal on relevance or ordinary business grounds and the failure of the proposed rules to deter shareholders from making an end run of the 14a-8 rules by introducing a proposal directly at the meeting under provisions of Rule 14a-4. While the Society's Securities Law Committee, in its comment letter and in discussions with Goldschmid and Millstein, noted concerns about both the override proposal and the 14a-4 changes, it supported the SEC plan as a whole, without any erosion of the central compromises. The committee reserved the right to reconsider ASCS support should the package undergo significant changes following the comment period. The points made in the ASCS letter are detailed on page 3. The Society's letter, as well as ones submitted by The Business Roundtable and Goldschmid and Millstein, are available from the National Office by contacting Blanca Rosbach at (212) 681-2010 or via e-mail to brosbach@governanceprofessionals.org. 
The Floor is open for nominationsThe Society's Executive Steering Committee requests members' help in identifying the best candidates for Chairman-Elect and for new positions on the Society's board of directors. Candidates must be regular members in good standing and must hold the title of Secretary or Assistant Secretary of their companies. Chairman-Elect nominees must also be current or former directors. Please forward your recommendations to David Smith at the National Office by February 13.
FROM THE CHAIRMAN Fellow Members:
As part of its fall meeting this year, the Society board gathered for a full-day strategic planning session. Our key purpose was to establish short-term and long-range goals for the board, the National Office and national committees. Who are we? Where do we want to go as an organization? How do we get there? We started with those questions and then began brainstorming. As the discussion continued, a theme began emerging: "The Corporate Secretary is the guardian of the Corporation's history, the conscience of its present and a partner in shaping its future." In this role, we provide continuity for a board or management team that may be undergoing key changes. We serve as a link between management and shareholders, play a key role in maintaining the records of the corporation, and also help preserve its historical documents. In recent years, we have also assumed greater responsibility for assuring that our companies' governance structures are appropriate and responsive to the interests and needs of both our shareholders and management team. And while most of us have been carrying out these responsibilities behind the scenes for a long time, the Society's board believes that it is time that Corporate Secretaries receive greater recognition for their efforts and for the key role they play in adding value to our companies. Enhancing knowledge within the business community and the business press of the role of the Corporate Secretary has been established as one of the Society's long-term goals. We want to be more "out front" about what we do and the service we provide. At our meeting in January, the board began examining suggestions for carrying out this goal. A key part of the Society's growth and advancement will be its future leadership. Please note the request on page 1 from David Smith for nominations for the next Chairman-Elect and the next class of directors. I encourage you to submit your suggestions to continue the Society's tradition of strong, active leaders. I had a chance to experience the breadth of expertise of our members when I attended several regional fall conferences this year. From the "Plain English" pioneering work of some of our group to the governance, investor relations and securities law efforts of others, ASCS members are clearly at the forefront in helping our corporations grow and evolve. I was very impressed with the strength of the programming at the different meetings and the knowledge of member and non-member speakers. This is a very busy time for the Society. Our Securities Law Committee is participating in ongoing discussions with the SEC staff concerning recent and future rulemaking - from shareholder proposal reform to electronic dissemination of disclosure materials. Our board met with the leadership of both the New York and American Stock Exchanges in January and will meet with Nasdaq leaders in April to discuss issues of common interest and to share our practical understanding of what's going on in our companies. Our Education Committee has seminars planned for January (a second "Essentials" program) and March (a "Beyond the Basics" with practical tips for more experienced Corporate Secretaries) and our Corporate Practices Committee has completed several valuable and impressive publication projects, including a new Annual Meetings Guidebook and revised model Directors' and Officers' Questionnaire. I also encourage you to share information about what the Society is doing and what ASCS has to offer to potential new members. Our membership campaign is in full swing, and you can win a great prize while you help the Society grow. You will also be joining the board in one of its key goals for this year - enhancing the Society's reputation.
"Beyond the Basics" seminar focuses on best practicesGovernance, ethics, technology and a wide range of best practices for the Corporate Secretary's office will be the focus of the Society's "Beyond the Basics" seminar at the Fairmont Hotel in San Francisco, March 19-20. The seminar program includes panels and breakout sessions on such issues as new trends and definitions involving the board of directors, insider trading compliance and enforcement, minutes writing, subsidiary management, traveling with the board, and developing a successful director orientation program. In addition, attendees will participate in a session on effective business and legal ethics that should qualify for CLE ethics credits in many states.Seminar faculty will also explore important technology issues, such as the "how's" and "why's" of setting up an Intranet page for the Corporate Secretary's office, issues involved in making software decisions or developing a corporate technology policy, and ways to update your corporate boardroom for the 21st century. Other highlights will include a luncheon address by one of the leaders of the effort in California to preserve and expand securities litigation reform against challenges from the plaintiff's bar and a closing session that will focus on the "core competency skills" corporate secretaries need to develop to thrive in today's belt-tightening corporate environment. Cheryl Sorokin of BankAmerica Corporation, the Society's Corporate Practices Committee Chairman, is chairing the seminar. The rest of the faculty includes Corporate Secretaries, attorneys, regulators, and other experienced practitioners from both inside and outside of corporations. In addition, CSC The United States Corporation Company has generously offered to sponsor a reception following sessions on the first day of the seminar. Brochures for the seminar have recently been mailed out from the National Office. To find out more about the program and registration, contact Harriet Chabrowe by phone at (212) 681-2009. To make hotel reservations at the Fairmont, call the hotel directly at (415) 772-5000 or (800) 527-4727. The hotel is extending the special seminar rate over the weekend following the seminar for those who want to stay longer in San Francisco.
Society supporst full shareholder proposal reform packageIn comments filed with the Securities and Exchange Commission in early December, the Society's Securities Law Committee offered its support for the overall package of reforms to the shareholder proposal system the SEC has proposed in Release No. 34-39093 as "a thoughtful, creative and good faith effort to address many of the concerns and complaints that have been expressed by companies as well as shareholders about the current rules." The letter also noted that should the compromise nature of the proposals erode - with substantial revision made to parts of the package - the Society would "have to carefully consider any such revisions and perhaps reconsider its support for the proposals."Here are highlights of the Society's comment letter. The full letter is available from the National Office through Fax-on-Demand (Document 151) or by faxing a request to Blanca Rosbach at (212) 681-2005. The letter has also been posted electronically on the SEC's website and can be accessed directly at http://www.sec.gov/rules/proposed/s72597/nordlun1.htm. Resubmission thresholds - The Society noted strong support from members for increasing the thresholds for resubmitting proposals to the levels proposed (6-15-30 percent), explaining that "if, after several attempts, a proponent is unable to persuade more than a small minority of a company's shareholders to support a particular proposal, then it is appropriate and fair that the proponent step aside for a while." Cracker Barrel reversal - While noting the clarity that the staff's Cracker Barrel ruling had provided on the admissibility of certain types of employment-related proposals, the Society noted support for reversing Cracker Barrel as a component of the overall reform package. Relevance exclusions - The Society called for retaining a relevance exclusion, preferably revising the current language of 14a-8(c)(5) by deleting the phrase "not otherwise significantly related." The ASCS also noted that the $10 million threshold proposed is much too low for large companies, as is the 3% alternative, and recommended a 5% measure of materiality that would match many other federal securities laws. Shareholder override - While expressing general and specific reservations about how an override mechanism could be successfully put in place, the Society recommended that any override percentage eventually approved be set at 6% to match the proposed threshold for resubmission of a proposal for a second year. Personal grievance - The Society supported the proposed "hands-off" approach, noting that companies would rarely attempt to exclude proposals not clearly motivated by personal interests because of the high cost of defending a court challenge. At the same time, the Society noted that the system could be improved in this area by requiring proponents to submit, along with their proposals, disclosures of material relationships between the proponent and the company, its directors, officers and employees other than the proponent's status as a shareholder. Discretionary voting - The Society expressed great concern with the proposed revisions to Rule 14a-4, noting that by requiring companies to provide a means for shareholders to withhold discretionary voting authority on proposals brought up on the floor of the meeting, that shareholders might be given "complete flexibility to put matters before shareholders free of all the reasonable restraints of Rule 14a-8." For example, proponents could submit as many proposals as they wish, without restriction as to subject matter or without concern about resubmission thresholds. "We are concerned that the proposed amendment of Rule 14a-4 would eventually render meaningless Rule 14a-8," the letter notes. Other Proposed Modifications - The Society generally supported such other modifications as increasing the minimum ownership level for a proponent, retaining the one-year ownership requirement, and eliminating the mechanism for proponents to obtain staff review of companies' statements in opposition. The ASCS expressed reservations about including information in the proxy statement about deadlines for submitting non-Rule 14a-8 proposals for the same reasons that it opposed the changes to Rule 14a-4. Securities Law Committee member Gwenn Carr, the principal author of the Society letter, reiterated points made in the letter during the Committee's recent meeting in Washington with members of the staff of the Division of Corporation Finance.
Study shows shareholders benefit from poison pillsThe results of a new study of the relationship between poison pills and shareholder value should lead some institutional investors to review their policies opposing shareholder rights plans, according to John Wilcox, Chairman of Georgeson & Company Inc. and a member of the Society's Securities Law Committee.The study, prepared by Jamil Aboumeri of Georgeson's Research Department, found that shareholders of companies with poison pills received $13 billion in additional takeover premiums during the five-year period from 1992-96, and shareholders of companies without pills gave up $14.5 billion in potential value. The study also noted that premiums paid to acquire target companies with poison pills were on average eight points higher than premiums paid for target companies without pills; that the presence of a poison pill at a target company did not increase the likelihood of the defeat of a hostile takeover bid nor the withdrawal of a friendly bid; and that poison pills did not reduce the likelihood that a company would become a takeover target since the takeover rate was similar for companies with or without pills. The Georgeson study focused on 319 target transactions (mergers, acquisitions, tender offers and acquisitions of majority interest) completed in the five-year period ending December 31, 1996, with deal size greater than $250 million. Of that group of companies, 105 had a poison pill six months prior to the first bid. The takeover premiums for the companies with poison pills averaged almost eight percentage points (or 26%) higher than premiums for non-pill companies. Takeover premium was measured as the price appreciation from one week prior to announcement of the first bid until transaction completion date, net of the change in the S&P 500 index over the same period (to account for market factors). The study also examined company size as a factor and determined that premiums for small cap companies with pills averaged 10 percentage points higher than those without, while premiums for large cap companies with pills showed a positive differential of approximately six percentage points over non-pill companies of similar size. Overall, the study noted that the 105 companies with pills that were the target of a successful takeover had a market aggregate value of $180 billion one week prior to the announcement of a takeover bid. The aggregate value of these completed deals was $233 billion, indicating that shareholders received $53 billion in takeover premiums. Using the correlations established in the study, Georgeson's researchers estimated that takeover premiums for these deals would have totaled only $40 billion had the companies not had pills. Similarly, the research team determined that deals involving the 214 companies that did not have pills could have resulted in $14.5 billion in additional takeover premiums - a nearly 31 percent increase - if those companies had poison pills in place prior to the first bid. Given the result of the study, Wilcox recommended that institutional investors review their portfolios and calculate for themselves the economic benefits they have gained from target companies with pills or lost from target companies without them. "In light of these finding, institutional investors, particularly those governed by ERISA fiduciary standards, might reconsider their voting policies [opposing poison pills]," Wilcox said. Copies of the Georgeson study can be obtained by calling (212) 440-9800 or by visiting the company's Internet website at www.georgeson.com.
New Society publications have new look and styleUnder the direction of Cheryl Sorokin, the Society's Corporate Practices Committee has undertaken the tasks of revising, combining, and generally revamping many of the Society's wide range of guidebooks, monographs, and survey reports. Committee members decided that not only the information in the publications needed updating but also the look of the books themselves. The result has been a series of practical texts for Corporate Secretaries and their staff focusing on one central subject - e.g., minutes writing, public disclosure and dealing with securities analysts, and board review of governance issues. The Committee's two newest projects have recently been published - a guidebook on preparing for and conducting Annual Meetings of Shareholders and an updated Directors' and Officers' Questionnaire. While each of those titles have long been in the Society's publications catalogue, the new editions have a different look and style. The new Annual Meetings manual has a smaller trim size than its predecessor, follows a plain English writing style, and contains more than 15 sample checklists, agendas, scripts, programs, memos and other addenda adapted from actual corporate documents. Principal draftsperson of the manual was Carol Ward of CIGNA Corporation. The new D&O Questionnaire, drafted by John Gailey of The West Company, Incorporated, not only provides a very useful proforma model that members can adapt for their own companies but has also been made available as a word processing file on disk to simplify its use. During the fall, members received a fax announcement and form for ordering complimentary copies of each publication. If you did not receive a form but would still like to order a copy of either publication, please contact Berta Czeczyk at the National Office as soon as possible at (212) 681-2015 or via e-mail to publications@governanceprofessionals.org. The Committee has several more projects underway for future publication, including a new Current Board Practices survey report.
Charitable contribution bills could have high costsTwo controversial bills proposed by Rep. Paul Gillmor (R-Ohio) to increase disclosure of corporate charitable contributions and even to put contributions to shareholder vote are unnecessary, unworkable and potentially costly, according to the Society's Nonprofit Committee. The Committee filed the letters with the Securities and Exchange Commission after the SEC requested comments on the potential costs and benefits of the two bills.[The two Society comment letters are available from the National Office directly via Fax-on-Demand (document 152) or by faxing a request to Blanca Rosbach at (212) 681-2005.] In opposing H.R. 944, which would require public companies each year to disclose to their shareholders the charities to which they made contributions and the amount of each contribution, the Committee noted that "there is no practical reason or policy justification for creating additional disclosure obligations about charitable contributions." Such disclosure would not only be very costly ("often nearly equal to the total of the contributions themselves") but is also undesired by most shareholders. Stockholders have overwhelmingly voted against shareholder proposals which have called for such additional disclosure in recent years, and few holders request the lists of charitable contribution recipients made available by many companies or their foundations. The Committee added that the passage of the bill might prove costly not only to corporations. Such a law could also jeopardize contributions to many charities, particularly smaller, regional nonprofits which do not have the high profile or "safe public image" of nationally-known nonprofits. According to the Committee, similar problems would result from passage of H.R. 945, which would require corporations to let shareholders decide each year which charities should receive contributions from the company and the amount of the gifts. "The process of soliciting shareholder instructions would be expensive, bureaucratic and time consuming….Even if a sensible process could be developed to garner shareholder 'votes' for contributions, it would favor large, well-known nonprofits over smaller, community-based ones…and would cause nonprofits to divert portions of their budgets from their operations to advertising and public relations in order to build name recognition and win shareholder support." The charitable contribution bills were among subjects discussed when the Society's Securities Law Committee met with representatives of the SEC's Division of Corporation Finance in December. At that time, SEC staff member Jonathan Gottlieb indicated that Rep. Gillmor is still supportive of the legislation and would like specific answers to such cost analysis questions as: (1) Does your company produce a document listing charitable contributions, and, if so, how large is the document and how many requests have you received for it in the past three years? (2) What might be the approximate cost of printing and distributing this document to all of your shareholders? (3) What percentage of your company's corporate giving is made to community or regional charities? (4) Does your company provide matching grants for charities to which employees make contributions? (5) Would it be impracticable to match contributions made by shareholders, and, if so, why? The National Office is also very interested in gathering answers to these questions and will pass along the information in an anonymous fashion to the SEC. Please send your responses to Michael Goodman by fax at (212) 681-2005.
Society NotesChicago Chapter is "golden" Chicago may sometimes be known as the "Second City," but the Society's Chicago Chapter is number one in ASCS history. The Society's first local chapter is celebrating its 50th anniversary in January 1998. Within a year after the Society was founded in New York in 1946, Corporate Secretaries in the Chicago area decided that the organization needed to spread to the Midwest as well. A small group of Secretaries, brought together by Ralph Bowers of Marshal Field & Company, Frank Wallace of Northern Trust and Stanford White of International Harvester, first met in 1947 at the University Club and then officially formed the Society's first local chapter on January 21, 1948. That small group has grown considerably over the years and the Chicago Chapter now totals 281 "golden" members. Milwaukee seminar attracts 125 For the sixth consecutive year, the Society's Milwaukee Chapter joined with financial printer Bowne of Milwaukee to sponsor a half-day seminar for Corporate Secretaries and attorneys in the local area. This year's program, which attracted 125 registrants, featured a luncheon address by John Wilcox of Georgeson & Company Inc. entitled "The Dramatic and Rapidly Evolving Impact of Technology on Corporate Communications." Other program highlights included a presentation on how to use "plain English" in corporate disclosures from Nancy Smith of the SEC and a panel focusing on current SEC developments and preparations for the 1998 annual meeting season. Panelists were Wilcox, John Dunn of The Northwestern Mutual Life Insurance Company and Hans Kirkegaard of Bowne of Milwaukee. The Society received approval for 3.5 CLE credit hours in Wisconsin for seminar attendees.
It has been a big year for Society member Michael Moran. Moran has recently been appointed to the board of directors of Spiegel, Inc., where he also serves as Executive Vice President, General Counsel and Secretary, as well as a member of the Office of the President. A few months earlier, Moran was chosen by the Illinois Retail Merchants Association (IRMA) as its new Chairman of the Board. IRMA represents 23,000 retail stores across the state and serves as the voice of retailing in the Illinois General Assembly. Moran has been with Spiegel for 27 years in a variety of key posts. He works with other members of the company's Office of the President to develop business and financial strategies for the Spiegel Group, and also heads up the company's legal, tax, public affairs, real estate and credit divisions. In addition, he serves as Chairman of the Board of First Consumers National Bank, a wholly owned Spiegel subsidiary. Moran has been a Society member since 1988.
Deborah Fox, the newest member of the National Office staff, brings strong administrative and computer experience to her job as the Society's Administrator-Membership. In her new position, Deborah will be responsible for maintaining the Society's membership database and Year Book information, communicating with new members and assisting the National Membership Committee. She replaces Bridget Wurzburg, who had served in the National Office for 18 years, and is now enjoying retirement with her husband in North Carolina. Prior to joining the staff, Deborah spent seven years assisting the Director of Fundraising at a large nonprofit organization. She also served as assistant manager of a boutique, continuing her longtime interest in fashion. Deborah is a native of Mississippi and has lived in the New York area since 1975. Society is shareholder proposal target again For the second consecutive year, the Society has been the subject of a shareholder proposal submitted by activist John Jennings Crapo. This year, Mr. Crapo's proposal to Adams Express Company requested that the company provide a report on action taken by the ASCS to censure and discipline the Secretary of the company and those of several other companies for failing to provide the proponent with certain information he had requested. Adams Express requested and was granted no-action relief from the SEC staff under the "personal grievance" provision of Rule 14a-8(c)(4). During the 1997 season, Mr. Crapo had submitted a proposal to Northeast Utilities System asking the company to request assistance from the Society in scheduling shareholder meetings for all U.S. public companies. At that time, Society President David Smith wrote to Northeast Utilities, noting that since the Society's membership represents less than 25 percent of all publicly traded companies, the ASCS "would not and could not" schedule annual meetings for all U.S. public companies. The company subsequently omitted the proposal from its proxy statement. Publications offer members discounts Members looking for practical information on proxy and shareholder service issues may want to subscribe to the Shareholder Service Optimizer, edited by longtime Society member Carl Hagberg. Each newsletter issue usually contains a range of cost and time saving tips plus expert insights on such topics as annual meeting planning, proxy distribution or transfer agent services. Others seeking tips on boardroom basics may want to examine the new online newsletter Boardroom Insider, published by governance expert Ralph Ward. This monthly e-mail publication features advice and descriptions of boardroom practices from Corporate Secretaries, counsel and others with an inside view of the boardroom. A recent issue contained articles about board mailing practices followed at Browning-Ferris Industries by Society member Gerald Burger and the director self-evaluation process coordinated at BankAmerica Corporation by Society member Cheryl Sorokin. Both newsletters are packed with useful ideas, and both are currently being offered at significant discount rates to ASCS members. For more information, contact Carl Hagberg at (609) 928-8133 and Ralph Ward at (517) 833-7615 (e-mail: rward@voyager.net). Gallagher cited by BusinessWeek When Terry Gallagher first joined the Society in 1979, he was Assistant Secretary at Pfizer Inc. Gallagher is still at Pfizer and still active in ASCS, but he has a different title now, Vice President-Governance. Terry was the subject of a profile in the December 8, 1997 issue of BusinessWeek, which contained a special report on the "Best and Worst Boards." The magazine dubbed Gallagher "the world's only vice-president for corporate governance" and cited his efforts to help Pfizer "build a reputation as a governance stalwart." In discussing his range of governance tasks, Gallagher described helping revamp executive compensation at Pfizer to link pay to performance, his regular schedule of meetings with shareholders and even his ability to win support from institutional investors for Pfizer's unique poison pill.
Proxy voting get "wired" on the Internet this seasonADP Investor Communications Services (ICS) is planning on opening up Internet voting by beneficial share-owners for all annual meetings in 1998. In addition, mailings of annual reports and proxy statements will be suppressed if the shareowner has indicated a preference to receive that information electronically. In 1998, ADP ICS is expected to mail over 100 million pieces of annual meeting material to shareowners that hold their positions in street name. If ADP can eliminate even five percent of those mailings, savings to the corporate community may be as high as $25 million, according to ADP ICS Vice President Mary Ann Butera.Internet and street-name processing In order for these savings to be realized by the corporations, the shareowner must indicate a willingness to receive proxy materials and voting instruction forms via the Internet. ADP ICS is now encouraging street-name shareowners to go on the Internet and "register" to receive their information electronically. By visiting a site called InvestorDelivery.Com, investors can register their individual brokerage account number along with a PIN number as a control feature. ADP ICS is working with the brokerage community to notify the investors of this process by including information in monthly statements it prints and mails for certain brokers. Once that information is entered, the shareowner will not receive a mailing for any position he or she holds within that brokerage account, assuming the corporate issuer is making its annual report and proxy information available electronically. Instead, the shareowner will receive an e-mail message announcing the availability of an electronic proxy voting instruction form and displaying the URL (electronic address) of the annual report and proxy statement. "By providing electronic distribution and voting technology, both corporations and shareowners benefit," said Bob Schifellite, Senior Vice President of ADP ICS. "Investors choose how they want the information and corporations clearly benefit by saving both postage and printing costs." In keeping with SEC recommendations, both Internet voting forms and telephone voting scripts offer the same options as do the printed voting instruction forms. Electronic options for registered holders ADP ICS is one of several vendors offering telephone and Internet voting options to corporations for their registered holders. In addition, several companies, such as Ameritech Corporation, are making it possible for all of their shareholders to vote by phone or over the Internet this season. To find out more about the different voting options and the firms offering them, contact Blanca Rosbach or Michael Goodman in the National Office. Recent tests conducted by ADP show the value of companies' calling particular attention to the different options voters can use. Butera said ADP advises issuers to use an insert alerting shareowners to the fact that Internet or telephone voting are options. Preliminary results show that five times as many shareholders vote electronically when a special insert is used.
ASCS membership update The combined membership recruiting efforts of the National Membership Committee, the National Office and individual members have produced strong results. As of December 31, 1997, the Society's total membership was up 140 over the same time last year. The current totals stand at 3,619 members from 2,512 companies (compared to 3,479 from 2,441 companies on December 31, 1996.) I want to thank all of our membership recruiters for their efforts so far this year and encourage you to keep up the good work. Names and companies of the more than 200 new members you have helped bring into the Society between September 1 and December 31 are listed below. The Society's growth is good news for all members. As our size increases, so will our programming opportunities and our impact in the overall business community. Remember you still have an opportunity to win one of the four vacation prizes being offered to those who sponsor new members to join during this year's campaign, which ends on March 31. The three top recruiters will earn trips to Marriott's Desert Springs resort in Palm Desert, California, a romantic weekend getaway at the St. Regis in New York or an enchanting weekend at the Mandarin Oriental Hotel in San Francisco. The fourth prize, to be awarded in a drawing open to any member who brings just one colleague into the Society, is a four-day stay at The Homestead in Virginia's Shenandoah Valley, including roundtrip airfare. If you need more membership brochures, tips on recruiting new members or a list of membership prospects, please contact Deborah Fox, the Society's new Administrator-Membership, at (212) 681-2014 or via e-mail to dfox@governanceprofessionals.org. And be sure to include your name as sponsor on the membership application for any new member you recruit, so you'll get credit for your valuable work. Some tips for establishing a working relationship with ISSby Patrick McGurnMr. McGurn is Director, Corporate Programs for ISS. He has participated recently in programs for several Society chapters, offering insights into issues of interest to institutional investor groups. In a recent profile of Institutional Shareholder Services, the Wall Street Journal noted that there is a "certain Wizard of Oz quality" about ISS. "Few people," the Journal said, "know who it is." The goals of this article are to introduce ISS to Corporate Secretaries who are unfamiliar with our role in the proxy voting process and to dispel some common myths about our firm. ISS is a business, not an activist group. Founded in 1985, ISS is now part of CDA Investment Technologies, a division of Thomas Financial Services. As the worlds largest proxy advisory service, ISS analyzes proxy issues and recommends votes for more than 15,000 shareholder meetings around the world each year. ISS's 400-plus institutional investor subscribers include many of the world's largest money managers, mutual funds and public employee, Taft-Hartley and corporate pension funds. ISS's mission is straightforward: Make recommendations that enhance long-term share value for our clients. To accomplish this task, ISS employs a full-time staff of 114, including MBAs, CFAs, lawyers and multilingual analysts. ISS hires an additional 40 temporary employees during the proxy season crunch. Roughly half of ISS's clients subscribe to our Proxy Advisory Service (PAS) and receive analyses of the ballot items for meetings held by companies in their portfolios. The rest of ISS's institutional clients outsource their voting activities to our Voting Agent Service (VAS). These investors delegate the physical portion of the process -receipt of ballots, reconciliation, casting votes and record keeping - to ISS. Some VAS clients instruct ISS to apply, subject to review, its standard voting recommendations. An increasing number of VAS clients, however, provide ISS with custom guidelines, which our voting agents apply to each ballot item. These custom policies may reflect a client's investment philosophy or nationally recognized standards, such as the AFL-CIO's model voting guidelines. Each PAS analysis includes: (1) a discussion - both pros and cons - of all voting items; (2) a company profile, including financial performance data and a breakdown of the board of directors; and (3) the vote recommendations. ISS analysts often solicit and always welcome input from corporations that expands upon the information provided in the proxy statement and the other annual disclosure documents. Such discussions can make the difference between a vote for or a vote against a proposal. Even if this information does not sway ISS's recommendation, it is often included in an analysis to help our clients and our custom voting agents in making vote determinations. Contrary to popular belief, most investors examine complex ballot issues on a case-by-case basis, so putting this information into their hands is crucial. It is best to initiate contact early. ISS's internal deadline for delivering an analysis to our clients is 17 days prior to the annual meeting date, while most reports are sent more than 20 days out. Pertinent information received by ISS after the initial delivery date (including changes in ISS's recommendations) is sent to our clients (even those who have already voted) in the form of an electronic "Alert." At a minimum, companies should send copies of their key disclosure documents to ISS as soon as they are available to ensure timely issuance of our reports. Communications are a two-way street for ISS. Over the past 12 months, ISS has made presentations at the Society's annual meeting in Boston and at numerous local chapter meetings. ISS also has appeared at meetings held by the American Compensation Association, the National Association of Stock Plan Professionals and other professional groups. As the largest governance research service in the world, ISS also is able to provide corporations with insights into the concerns of institutional investors. A subscription to ISS's Proxy Issues package, for example, would enable a company to receive several key publications sent regularly to our institutional investors - weekly Friday Report briefings, monthly ISSue Alert newsletters and our 600-page Proxy Voting Manual, which spells out all of the ISS's voting guidelines. To demystify both the voting process and our role in it, ISS created a Corporate Programs division in 1996. Since its inception, Corporate Programs has had hundreds of conversations with Corporate Secretaries. By listening to your questions and concerns, ISS has been able to develop products and services that meet most corporate informational needs. In response to numerous inquiries about ISS's methodology on stock-based compensation, for example, we spent the last year building ISSue Compass, a state-of-the-art, Internet-based product that allows corporations to calculate the cost of their stock-based pay plans using ISS's proprietary Shareholder Value Transfer Model. Finally, ISS also invites members of the Society to provide feedback to us concerning our voting policies. Real world experiences and insights shared by corporate practitioners have played a significant role in the evolution of our voting guidelines over the past several years. We look forward to continuing these discussions and to broadening our ongoing dialogue with the corporate community. To contact ISS, call 301-718-2255. Commentary - Caremark decision imposes monitoring role on directorsOne highlight of the Society's Issues Update seminar in November was a panel focusing on the board's expanded role in monitoring corporate activity and compliance and potential liability in shareholder derivative suits following the 1996 Delaware Chancery Court decision In re Caremark. Participants on that panel included Hon. Jack Jacobs, Vice Chancellor, Court of Chancery of the State of Delaware, and corporate attorneys Geoffrey Fallon, George Frazza, and Daniel Goldman. Chancellor Jacobs opened the discussion with comments on the Caremark decision and its significance. He noted that in Caremark, the Delaware Court decided that it is the duty of the board to assure that a company has an adequate reporting system for compliance. If the board does this, and a disaster still occurs, the liability of the board will come under the Business Judgment Rule and the board will not be held liable unless it lacked good faith in its monitoring duty. Anyone who sues the board on this theory now has a high hurdle to overcome. "The decision leads to several observations," Jacobs added. "For one thing, it is important to distinguish between the flow of information to the board and a compliance system. What's new since Caremark is holding that the Board had a duty to be informed about systems. Caremark also raises questions about implementation that are not answered in the case itself. For example - Is there a duty to set up a compliance system? It doesn't answer that question exactly, but it does say that you have to make an attempt in good faith to decide if the company should establish a system. The answer depends in part on the business the company is in and whether it is liable to disasters, such as companies that deal with the environment, oil or health care. Are there rules that provide guidance on how to establish a system? There is currently no fiduciary duty that provides for such rules. What are the mechanics of such a system? What should the board be hearing and from whom? Should the audit or a special compliance committee be involved? "I think there are two times when a special committee should be established: (1) When the task is too specific or time consuming for the whole board to decide; or (2) as a reactive measure after the board has been sued and possible conflicts of interest may result from the whole board's focusing on the issue." Continuing the discussion, Goldman focused on product liability suits and the role of the board in preventing them. He noted that for a corporation entangled in a product liability crisis, the exposure may become the single largest liability that the company will ever incur. "What leads to punitive damages is deceptive conduct," Goldman said, "and what is at the heart of corporate deception is usually a lot of fear among employees of giving management bad news. One key role the board can play is in combating this sense of fear. Strong board leadership can foster a culture within the organization that disclosure of bad news is not necessarily bad but often necessary to prevent potentially massive future liabilities." Goldman offered the following suggestions for board action: (1) draft a product liability compliance and prevention policy; (2) appoint a Safety and Risk Management Council consisting of senior financial, marketing/sales, engineering and legal officers of the company; (3) appoint a Claims Review Council; (4) mandate routine safety and risk management training of employees; (5) encourage appropriate record keeping (It is better to have good documentation of problems than no documentation at all.); and (6) establish an in-house hot line or e-mail system for anonymous employee communication about product liability problems. "These steps won't guarantee that a products liability disaster will be averted, but they can minimize, to the extent possible, the downside risks," he concluded. Frazza, who lived through a major liability disaster when he was General Counsel of Johnson & Johnson during the Tylenol tampering scare, offered his own insight on the roles of directors and management during a crisis. "I believe the quality of management is more important than the quality of the board in such instances. The question of product integrity and quality rests entirely in management's hands. However, the board can and should concentrate on the processes of how decisions are made and bring a discipline to management's decisions," he said. Fallon focused on another potential disaster area the Caremark decision may impact - directors' duties and liabilities for year 2000 computer problems. To limit such liability, Fallon recommended that the board should assure itself that management has investigated the corporation's exposure to year 2000 problems by: (1) requiring a written report and oral presentation from management on company preparations for dealing with potential problems; (2) considering with management the necessity or advisability of retaining outside consultants to advise the board on the year 2000 problem; (3) reviewing the written and oral reports to decide if they are credible and accurate, to determine if the board has confidence in management's ability to deal with the problem, and to determine whether the board will authorize the funds to carry out the actions recommended by management in the reports. "By taking such decisive action, the board can help management deal with a potential disaster and protect individual directors by limiting personal liability for year 2000 losses incurred by their companies," Fallon said.
Of InterestMore women are serving on boards Women hold 10.6 percent - or 643 - of the total 6,081 board seats on Fortune 500 companies, according to a 1997 study conducted by Catalyst, an organization that helps to promote the role of women in business. That's a three percent increase from last year and an 18 percent rise since 1994. Catalyst's study also notes that 419 of the 500 companies (84%) have at least one woman director, up slightly from 417 in 1996. In all, 444 individual women currently serve on Fortune 500 boards, 53 of whom were new to service in 1997. Also, for the first time in 1997, a Fortune 500 company achieved gender parity. Golden West Financial in California not only has a woman chief executive but also a board composed of five men and five women. Examining the entire group of 444 women on boards, Catalyst noted that the greatest number (27%) work in corporate positions, two-thirds of them in line positions, while others come from academia (16%), are entrepreneurs (15%), are foundation and nonprofit executives (13%) or work in legal, government, investment, medicine or consulting occupations. ADP expands its influence ADP Investor Communications Services, which has been handling proxy distribution and vote tabulation for up to 70 percent of street-name holdings, has expanded its sphere of influence significantly by signing multi-year agreements to conduct proxy mailings for three of the four formerly "independent" brokerage firms. Following signing of the agreements, ADP will handle 1998 proxy distribution for Merrill Lynch, Prudential Securities and Paine-Webber, in addition to its former clients. Only Dean Witter Reynolds remains independent. According to figures cited in Security Industry News, the new deals will increase by about 10 percent the number of mailings to be made by ADP for the 1998 fiscal year (from 277 million in 1997 to approximately 300 million this proxy season). ADP handles mailings for some 900 broker-dealers and banks and 400 mutual fund companies. ADP has indicated that the new deals will probably mean reduced costs to issuers from lower out-of-pocket and other expenses. They may also make it easier for ADP to expand its efforts at householding and electronic distribution and vote return, all of which may save issuers money. SCC offers free help with lost securityholder compliance Shareholder Communication Corporation (SCC) is offering cost-free assistance to issuers and their shareholders in meeting new obligations imposed by recently-adopted Rule 17Ad-17. The rule requires that, over a period of three to 24 months, transfer agents must make two attempts to correct addresses of lost securityholders by submitting the holders' tax identification numbers through one or more national databases. Verification of newly-found addresses is recommended but not required. SCC will carry out the two database searches and include verification without charge to the issuer, its transfer agent, or its lost security-holders. For the most difficult cases that require more than the two initial searches, the company can hire SCC to apply its more extensive search techniques to locate lost holders. To contact SCC about its Free Compliance Program, call (212) 805-7000 or send e-mail to kkimtis@sccorp.com. CalPERS adopts new evaluation process Concerned that some corporate managers are "pumping up" their stock values using common accounting procedures, CalPERS has adopted new statistical procedures as part of its revamped corporate governance program for 1997-98. The new procedures are called "economic value added," or EVA. EVA represents a company's after-tax net operating profit, minus its cost of capital for one year. The theory behind the procedure is that a business is not adding value unless its return on total investment exceeds the cost of capital. A company with a series of negative EVAs is sometimes characterized as a wealth destroyer, rather than a wealth creator. According to Stern Stewart & Associates, the consulting firm than will carry out the analyses for CalPERS, some of the largest U.S. corportions had negative EVAs in 1997 - including RJR Nabisco, Digital, Westinghouse and General Motors. CalPERS has noted that having one year's negative EVA will not necessarily mean that the company is in trouble or will be named to the pension fund's corporate governance focus list. However, a company that experiences three years of negative EVAs, that is underperforming in the market and that has poor governance practices by CalPERS' standards would be considered for the focus list. The CalPERS list is watched closely by other institutional investors and shareholder activists. SEC provides Year 2000 guidance In remarks at the Society's Issues Update seminar, Brian Lane, Director of the SEC's Division of Corporation Finance, noted that Commission staff will be reviewing all 10-K filings this year looking for disclosure on anticipated costs, problems and uncertainties associated with the Year 2000 issue. "If you don't make this disclosure, we'll ask you why not," Lane said. "If you explain that you have done a study and see no material liability, we'll probably leave you alone. However, if your company hasn't done an assessment, you can't legitimately say that you see no material problems arising from the Year 2000." Lane added that if the Year 2000 poses a material problem for a company, the staff will expect the MD&A section of the company's annual report to discuss company plans and costs in detail. To help public companies understand their disclosure obligations and alternatives regarding Year 2000 issues, CorpFin has published Staff Legal Bulletin No. 5 with staff views on the subject. The Bulletin was first issued in October and has been revised as of January 12, 1998 to provide more specific guidance. Members can obtain copies directly from the SEC's Internet website.
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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Mark your calendar today! San Diego's elegant and exciting Hotel del Coronado will be the site of the Society's 52nd National Conference, June 24-28. The central theme of the meeting will revolve around the Secretary's key communication function in keeping the board, management and shareholders well informed
Moran appointed to Spiegel board
Deborah Fox joins National Office staff
Laura Nyquist of NCT Corporation had the daunting but enviable task of helping to create a new board for a new company. She discussed her experiences at NCR at the Society's recent Issues Update seminar.