|
|
search | help | site map | contact us |
|
|
|
 Number 2-98
Year 2000 Issues teleconference reaches 1,000 listenersThe Year 2000 problem is primarily about numbers. The need for computer systems, software and imbedded computer chips to respond smoothly to a four-digit date change rather than a two-number changeover when January 1, 2000 arrives has most Corporate Secretaries and their colleagues concerned about other numbers: How many days or months will it take us to assess and correct how the change will affect our own computers? How much will making the assessment and needed corrections cost? What is our potential liability? How much insurance coverage do we need to deal with the problem and what will the needed coverage cost? What cost and liability estimates do we need to include or at least note in disclosure documents and SEC filings? These number concerns are one reason why a record number of members and their colleagues tuned in to the Society's latest "Experts on the Line" teleconference on March 31. The one-hour conference call on Year 2000 Issues was transmitted on approximately 330 phone line connections, with up to 1,000 listeners tuning in to comments by a panel of experts on Y2K issues. Panelists included Barak Romanek from the Office of the Chief Counsel at the SEC's Division of Corporation Finance, corporate attorney Klaus Eppler of Proskauer Rose LLP, David Pittman of Price Waterhouse LLP, Geoffrey Fallon of J&H Marsh & McLennan and Stephen Norman of American Express Company, who served as moderator. [An audiofile of the teleconference has been added to the Society's Internet website, along with several documents that may assist companies in their Year 2000 preparations, including a Year 2000 Checklist prepared by Proskauer Rose LLP and a description of a new Y2K insurance policy developed by J&H Marsh & McLennan.] Here are some key points made by the panel of experts and some of their suggestions for future corporate action to help deal with the Y2K problem: Mr. Romanek noted that the Commission expects many companies to include disclosure about its Year 2000 preparations in the MD&A section of their Form 10K filings this year. And, in fact, if a company has not started or completed its assessment of the impact that Y2K may have upon it, that alone would probably trigger disclosure under MD&A. He also added that just because your company has set up a plan or gotten insurance coverage does not exempt the company from the need to disclose, if it is determined that the Y2K issue may create a material problem. The SEC has provided specific guidance on its website concerning Y2K disclosure issues. A direct link to the Commission's Year 2000 Internet location is available from the Society's website. Romanek noted that the Commission had seen a marked increase in Y2K disclosure statements in February 10K filings but that many did not incorporate information on all of the recommended issues. The staff will review of sampling of the large number of 10Ks filed on March 31 and then determine if further guidance may be needed. Mr. Eppler focused on such topics as the obligations of the board with respect to Year 2000 preparations and the need for the company to make several internal audits as it assesses its Y2K problem. The board does not need to micromanage the issue to meet its duty of care," Eppler said. Instead, it needs to get assurance that the company is conducting an audit or survey of the potential impact of the problem and that the assessment includes vendors or service suppliers. If the problem is determined to be material, the board should discuss budgeting, materiality and disclosure. The board should fix responsibility with management and put in place some mechanism for reporting to the whole board or one of its appropriate committees. Eppler added that his firm has prepared a Y2K checklist for clients that recommends: (1) making a technological audit, listing all items the company uses or supplies to others that may be impacted by Y2K; (2) conducting a legal audit, including checking warranty agreements and licenses to determine where third parties may be responsible for paying for Y2K upgrading and reviewing existing insurance policies and document retention policies; and (3) focusing on steps that should be taken to fix the problem, such as obtaining rights to access software source codes without breaching warranties, getting waivers or releases. A summary of the checklist has been added to the Society's website or is available by contacting Blanca Rosbach in the National Office at (212) 681-2010 or brosbach@governanceprofessionals.org. Eppler and Pittman also focused on accounting considerations with regard to Y2K remediation. They noted that costs for modifying systems should be expensed as they are incurred, while costs for replacing software or hardware may be able to be amortized. Pittman, who specializes in Y2K issues that are outside the Information Technology area, added that companies should think in their Y2K planning about three key dates that come prior to January 1, 2000: June 30, 1998, when budgets looking out 18 months will be formulated; January 1, 1999, if the company is taking advance orders 12 months ahead; and September 9, 1999, which is a problem in some systems since 9/9/99 was a termination command under old COBOL programming. Mr. Fallon focused on risk management and insurance coverage for Year 2000 liability. He noted that new insurance plans are being made available to companies that insure against business interruption, contingent business interruption (caused by problems with a third party that results in a loss of revenue by the company), liability claims, and hot site expenses (if the company's systems go down and it must use an outside service bureau to handle computer requirements). Costs for the insurance will likely be high, and insurance companies will probably require companies to undergo an audit of their Y2K compliance status. Fallon said that such an audit will cost from $125,000-$400,000 - though it will probably be a useful management tool in any case - with up to 50 percent of the audit cost credited to the insurance premiums. During the Year 2000 teleconference listeners were asked to respond to a straw poll, with the following results:
FROM THE CHAIRMAN Fellow Members:
While the Society prides itself on being a national and even an international organization, much of our most important programming and networking goes on at the local level. Each of our 25 chapters has its own membership and leadership structure. Yet they have common problems and issues as well. For that reason, we recently organized a Presidents' Council, composed of presidents of each of the chapters. The Council held its first meeting via teleconference on March 16 and plans to gather twice more this year - once face-to-face at the National Conference in June and another time via teleconference in the fall. The key goal of the Council is to establish closer communications among leaders of the different chapters and to enhance links between the local and national levels of the Society. Through the Council, the chapter presidents will be able to share their groups' best practices with each other and suggest solutions that have worked for them in the past. The Council will likely focus on such issues as chapter programs, membership recruitment and retention, and leadership development, but we hope the regular gatherings will open up a useful dialogue on a wide variety of topics. Our first meeting lasted approximately an hour with all chapters represented. The first half of the meeting consisted of a National Office update and presentations from the chairmen of our Corporate Practices, Securities Industry and Securities Law Committees. Following the presentations, Council members had an opportunity for an open discussion of a range of topics involving chapter structure, chapter programs and networking issues. One person who was impressed by the potential of the Council was Craig Nordlund, a former San Francisco Chapter president who currently chairs the national Securities Law Committee. He noted that the Council is a great idea that he wished had been in place when he was struggling to find new ideas for chapter activities and membership development in San Francisco. The new Council is just one key element in the Society's spring programming. On April 14, the Board and representatives from the Securities Law Committee will be making presentations at the Securities and Exchange Commission for our annual meeting with the Commission and staff. The same day, the Board will host a luncheon for leaders of The Nasdaq Stock Market and a reception and dinner for staff at the SEC. As the Society's first Chairman from a Nasdaq-listed company, I'm interested in expanding our dialogue with that group, and we are looking to new types of programs that will appeal to our current Nasdaq members and encourage more secretaries from Nasdaq companies to join the ASCS. We're not ignoring the New York and American Stock Exchanges, however. An exciting membership initiative was recently worked out at a meeting among myself, Dick Grasso and Jim Buck from the NYSE, David Smith, national Membership Chairman Don Hager and several other Society leaders. The NYSE has agreed to underwrite the first year's dues for membership in the Society of Corporate Secretaries of all new domestic listings in 1998. Each new NYSE member will be assigned a mentor from among current members. In addition, ASE Chairman Richard Syron has agreed to write a letter to Corporate Secretaries of all American Stock Exchange companies not represented in the Society's membership outlining the benefits of belonging to the ASCS and encouraging them to join. And speaking of programs, I hope many of you are making plans to attend the National Conference at the Del Coronado in San Diego, June 24-28. We've got some great speakers lined up - like media notables Jeff Greenfield and Peggy Noonan and business leader David Coulter of BankAmerica Corporation - and a full agenda of business and social programs, committee meetings, sports tournaments and networking opportunities. The Society has been putting on these annual conferences for 52 years now, so we have learned to do things right. I look forward to seeing all of you in San Diego.
1998-1999 Seminar CalendarBelow are dates and locations for Society seminars during the 1998-1999 season. Brochures detailing program and faculty information will be mailed out several months before each seminar.
|
||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Rank | Top 15 Practices | Number of Companies Adopting |
|---|---|---|
| 1. | Directors' compensation includes stock or stock options, restricted stock or stock-based units | 187 |
| 2. | Directors compensation deferral plan which includes a stock price related investment feature | 110 |
| 3. | Written guidelines on board practices or corporate governance principles | 96 |
| 4. | Periodic Board meetings primarily devoted to review of company strategies | 95 |
| 5. | Periodic assessment of Board of Directors functioning/effectiveness | 94 |
| 6. | Directors have direct access to management | 91 |
| 7. | Outside Director formal review of CEO performance | 90 |
| 8. | Agenda item background information routinely distributed in advance of meeting | 84 |
| 9. | Stock ownership guidelines for Directors | 80 |
| 10 | No Employee or former Employee Director on Audit Committee | 74 |
| 11. | No Employee or former Employee Director on Compensation Committee | 73 |
| 12. | Nominating Committee conducts independent screening, selection of Director candidates | 68 |
| 13. | Decision to reduce size of Board of Directors | 67 |
| 14. | Board meetings' calendar specifying agenda topics to be covered over the year | 64 |
| 15. | Job description of Chairman or CEO | 60 |
| Rank | Top 15 Practices | Number of Companies Adopting |
|---|---|---|
| 1. | Agenda item background information routinely distributed in advance of meeting | 408 |
| 2. | Directors have direct access to management | 387 |
| 3. | No Employee or former Employee Director on Audit Committee | 369 |
| 3. | No Employee or former Employee Director on Compensation Committee | 369 |
| 5. | Majority of Directors on Board must be outside Directors | 351 |
| 6. | Periodic Board meetings primarily devoted to review of company strategies | 301 |
| 7. | Mandatory retirement age for Directors | 295 |
| 8. | Directors compensation includes stock or stock options | 270 |
| 9. | Outside Director formal review of CEO performance | 211 |
| 10. | Nominating Committee conducts independent screening, selection of Director candidates | 202 |
| 11. | Outside Directors routinely input to agenda development | 194 |
| 12. | No Employee or former Employee Director on Nominating Committee | 168 |
| 13. | Job description of Chairman or CEO | 163 |
| 14. | Board meetings' calendar specifying agenda topics to be covered over the year | 159 |
| 14. | Formal orientation program for new Directors | 159 |
The Society's annual meeting with Commissioners and staff of the SEC is set for April 14 at 10 a.m. ASCS Securities Law Committee chairman Craig Nordlund has proposed an agenda of specific topics for discussion during the two-hour session. Among issues the Society intends to address are Year 2000 disclosure; the philosophy behind and application of proposed changes to Rule 144 to small trades by directors and executive officers; corporate experiences with electronic dissemination of proxies and annual reports; the Commission's proposed changes to Rule S-8; the status of the shareholder proposal reform efforts; issues raised during the Society's two proxy process forums; the SEC's new Rule 701 release; and additional regulatory priorities from the point of view of corporations or the Commission. Society speakers will include Nordlund, ASCS President David Smith, Stephen Norman, Donald Fried, Margaret Foran and Gwenn Carr.
The Society's board will be meeting in Washington in conjunction with the ASCS meeting with the Commission. Other events planned on April 14 include a luncheon with leadership of the Nasdaq Stock Market and NASD Regulation, Inc. and a reception and dinner with members and senior staff of the SEC.
In addition to preparing presentations for the April 14 meeting, committee members are also working on comment letters on both the new S-8 and Rule 701 releases. These will be available from Blanca Rosbach in the National Office once they are finalized.
The Society's Securities Industry Committee was hosted at its March 30th meeting by Chairman Larry Menter at The Home Depot's headquarters in Atlanta. Approximately 20 members of the committee attended in person and an additional 10 joined the session via teleconference.
Among highlights of the meeting were discussions of the SEC's proposed rules concerning householding of proxy or other mailings to shareholders, the status of the Direct Registration System and company direct stock purchase plans, issues involving the Year 2000 problem and new developments in the areas of escheat and abandoned property. The Committee also received an update on the New York Stock Exchange's proxy mailing fee proposal and audit, as well as an update on the Society's proxy process forums and committee work (see article).
Echoing comments made in a letter filed previously with the SEC, Committee members expressed their hopes that the SEC would modify its householding proposal to permit meaningful reductions in the delivery of both proxy statements and annual reports, which represent the major cost for issuers in the proxy process. (The Commission proposal would permit householding in the mailing to record holders of only prospectuses and annual reports, but not of the actual proxy material that is often mailed with an annual report.)
In discussing direct registration, committee members noted that the system is now open to all issuers and is relatively easy to get into. The major task is to educate both the investing public and broker-dealers concerning the logistics and value of the system. The Securities Industry Association (SIA) is set to issue a new publication on the subject, which should enhance the education process.
The abandoned property discussion focused around new obligations of transfer agents with respect to lost shareholders (see article on page 11 of this newsletter) and changes in several states' procedures and holding periods. Focusing on proxy fees, representatives of the NYSE noted that the Exchange had received SEC approval to reduce fees from 55 cents to 50 cents for mailings of 1998 proxy material for proxy materials to street name holders by ADP and brokers. The NYSE has also, in a separate filing, asked the Commission to hold the fees at the reduced level for three years.
The ASCS Corporate Practices Committee will hold its next meeting on April 13 in Washington, in conjunction with the Society's SEC meeting. Among the major topics of discussion will be the ambitious publishing projects in which Committee members are involved under the leadership of Chairman Cheryl Sorokin. The Committee's newest publications include the updated and expanded Annual Meetings of Shareholders Guidebook which “hit the shelves” in January and the new Current Board Practices: Second Study, which is now available for distribution or purchase (see article).
Other projects nearing completion of the drafting stage include monographs on Corporate Codes Of Conduct and Director: Selection, Orientation, Compensation and Retention. Committee members whose companies have adopted formal corporate governance guidelines have also submitted these to the National Office, and a compilation will be printed and made available in the near future.
The Committee also intends to send out two major survey questionnaires to Society members in the next few months - one on company practices with regard to committees of the board and the other the periodic survey on compensation of Corporate Secretaries and Assistant Secretaries. These surveys provide the basis for reports that hold special value for Society members and their companies, so it is important that as many members as possible complete and return the questionnaires.
The Securities and Exchange Commission has recently issued three rulemaking releases aimed at ending certain abuses that have occurred under Regulation S with respect to equity securities of domestic issuers, addressing abuses in the use of Form S-8 for capital raising and easing the overly restrictive limits that currently apply to the use of Rule 701 to let private companies sell securities to their employees.
[The Society's Securities Law Committee is currently reviewing all three releases and intends to file comments on the Form S-8 and Rule 701 rule proposals.]
In Release Nos. 33-7505, 34-39668, issued on February 17, the Commission amended Regulation S, which provides a safe harbor from the Securities Act of 1933 registration requirements for offers and sales of securities outside the U.S. Some issuers had been using Reg S as a guise for distributing securities in the U.S. markets without registering them under the 1933 Act. As amended, equity securities of domestic issuers which have been sold under Reg S will now be classified as “restricted securities” within the meaning of Rule 144 and subject to all of the resale requirements under Rule 144. The restricted period, which has been renamed the “distribution compliance period,” applicable to these equity securities has been lengthened from 40 days to one year, and then all of the Rule 144 resale restrictions will apply until the completion of the two-year Rule 144(k) cutoff. The rule changes become effective April 27, 1998, and the rule will not be applied retroactively.
The Commission took action on the amendments to end abuses in the use of Reg S and perhaps use of Reg S entirely. SEC Corporation Finance Director Brian Lane said he hopes these amendments are the “final nail in the Regulation S coffin.”
Currently, sales of equity securities by domestic issuers under Reg S have been required to be reported on Form 8-K. The SEC will continue the 8-K requirement until January 1, 1999, in order to monitor the effectiveness of the new Reg S procedures. After January 1, Reg S sales are to be reported quarterly on Forms 10-Q and 10-K (as is the case now with all other unregistered sales of equity securities).
In a second release, also issued on February 17, the Commission proposed amendments to Form S-8 under the Securities Act of 1933, both to curb current abuses or misuse of the form and to allow employees' family members to use the form to exercise options issued under employee benefit plans.
Form S-8 provides abbreviated disclosure for offers and sales of securities used to compensate employees, including consultants and advisors who render bona fide services to the company - such as a doctor on the faculty of a medical school who advises a pharmaceutical company. It is not intended to be used for capital raising transactions. However, some companies have abused Form S-8 by using it to register securities issued to consultants and advisors whose chief function is to turn around and sell the securities to the public and then directly or indirectly convey the proceeds to the issuer or who otherwise promote the company's securities.
The proposed revisions to Form S-8 set forth in Release Nos. 33-7506, 34-39669 clarify that the form is not for use for such improper sales to consultants and advisors and require disclosure in Part II of Form S-8 of the names of any consultants or advisors to whom securities will be issue, the amount of the securities and the nature of the services provided. In addition, the Commission is soliciting comments on several other approaches to correcting the problem, such as limiting the percentage of the total number of the registrant's securities outstanding that may be registered on Form S-8 for issuance to consultants and advisors or requiring specific certification of the legitimacy of the services being rendered by the consultants or advisors.
In a separate Form S-8-related proposal, the Commission proposes to simplify the rules for use of the form for registering securities underlying stock options to permit transfer of options to family members for estate planning purposes or for divorce settlements. Currently Form S-8 is available for the exercise of employee benefit plan options only if the option is exercised by the employee/optionee. In other cases, the company must register the sale of underlying securities on a separate, more complex registration statement. The proposed amendments would make Form S-8 available for the exercise of employee benefit plan options by an employee's family member who has acquired the options from the employee through gift or domestic relations order; make Form S-8 available for the exercise of transferable, as well as non-transferable, options; and revise executive compensation disclosure requirements to clarify how options and stock appreciate rights (SARs) that have been transferred should be reported. In addition, the Commission proposes to make Form S-3 equally available for the offer and sale of securities underlying warrants and options, without regard to whether either class of securities is transferable.
The third release, Release No. 33-7511, relates to Form 701, which allows private companies to sell securities to their employees without the type of registration required by public companies. Current rules exempt offers and sales of up to five million dollars a year in Rule 701 transactions by a private company. Passage of securities legislation by Congress, however, now gives the SEC the authority to raise the exemption levels. In the release, the Commission notes that the $5 million limit is too restrictive due to the rise in equity ownership by employees, the effects of inflation and the increase in deferred compensation plans, which are eligible for use of Form 701. The Commission proposes to allow private companies to rely on Rule 701 to sell in one year the greatest of $1 million, 15 percent of the issuer's total assets or 15 percent of the total outstanding securities of that class. Offers will not count when calculating the ceiling.
The proposals would, however, require companies to disclose certain risk factors in connection with the investment. The SEC is also soliciting comments on whether there should be a specific offering price ceiling, such as $10 million, $15 million or $20 million.
Securities sold in reliance on Rule 701 would continue to be “restricted” and would be subject to resale restrictions. In light of the Form S-8 abuses addressed in the earlier release, the Commission also seeks comments on amendments to regulate the continuing eligibility under Rule 701 for consultants and advisors.
The Society may have to change its name soon. The Society's Internet website is already having an impact in turning the ASCS into the ISCS (International Society of Corporate Secretaries). In the last four months alone, new members have joined the ASCS from companies in Bermuda, Indonesia, Israel, Nigeria and the United Kingdom. How did they hear about the organization? From visiting us on the Internet and then getting in touch with the National Office by phone or e-mail.
The website was created primarily as a new way to provide members with instant information about new ASCS programs, proposed and adopted corporate regulations, and links to other valuable information resources. That was its main mission. But a secondary goal was to bring information about the Society to non-members and potential new members around the country and around the world.
Russell Benasaraf, the Society's Computer Systems Administrator and the chief architect of the website, compiles statistics concerning who is visiting the website, where they come from and where they go within the website once they arrive. He notes that in March, more than 2,800 different users logged on to the Society's homepage at www.ascs.org. Hits on the website came from the following countries outside of North America: Australia, Malaysia, Bermuda, New Zealand, Netherlands, United Kingdom, South Korea, Brazil, South Africa, Japan, France, Taiwan, Singapore, Bahamas, Trinidad and Tobago, Germany, Indonesia, Croatia, Belgium, Ireland, Luxembourg, Saudi Arabia, Switzerland, United Arab Emirates, Brunei Darussalam, Spain, Norway, Portugal, Russian Federation, Sweden, Thailand, Italy, Austria, Denmark, Finland, Israel, Iceland, Latvia, Mauritius, Czech Republic, and the Philippines.
Two individuals who checked out the website first and then joined the ASCS are Temitope Ibikunle, Secretary of Xerox H.S. Nigeria Ltd., and Avi Koren, Secretary of Cellcom Israel Ltd. Both indicated that they may be attending the National Conference in San Diego in June or the Society's next Essentials seminar in Atlanta in October. Koren even made a visit to the National Office during a recent trip to New York to meet staff members and hand-deliver his membership application.
They are just two of several hundred new members who have joined the Society since our last membership directory was compiled in June 1997. A Members Year Book update containing names, addresses and contact information for new members who joined the ASCS between July 1997 and February 1998 is enclosed with this newsletter.
“Welcome to Cyberspace! Your company now has modems, and you've subscribed to services that provide e-mail and access to the World Wide Web. You may even have your own Intranet. The doors have just opened, and the legal problems have only just begun to surface.”
With that introduction, Mary Guilfoyle of Epstein Becker & Green in San Francisco opened her breakout group discussion on “Developing a Corporate Technology Policy” at the Society's recent “Beyond the Basics” seminar, held in San Francisco March 19-20. Guilfoyle offered several war stories, a few horror stories, and lots of practical advice on why and how to set up a corporate policy to deal with employees' use of e-mail and the Internet. She noted, specifically, that any such policy should include at least the following eight elements:
A sample corporate Internet policy was included in the seminar workbook. Copies of additional policies are available from Blanca Rosbach in the National Office at 212-681-2010 or brosbach@governanceprofessionals.org. Blanca has also requested that members whose companies have already adopted policies provide copies to the National Office. All identification of the company will be removed before the document is sent out to others.
Following up on on one of the issues raised in a recent fax sent by the National Office to establish an Internet chat discussion among members from Nasdaq listed companies, Robert Schifellite of ADP Investor Communication Services contacted all Nasdaq members to discuss how their companies could save money on proxy mailing costs by using bulk mail for part or all of their mailings. As of April 2, Schifellite reported that ADP had reached 175 companies with the following results: 23 decided to use third class bulk mail with estimated savings of nearly $200,000, 13 indicated interest in third class bulk with estimated savings of more than $87,000, three intended to stratify their mailings in order to save an estimated $174,000, 42 will continue to use first class since their material is not available soon enough for third class, 24 will review and decide, and the others either were unable to make a decision because of extenuating circumstances or had not yet replied to ADP.
Speaking at the Society's recent “Beyond the Basics” seminar in San Francisco, Society member Richard Koppes, former Chief Counsel of CalPERS, now with Jones, Day, Reavis & Pogue, and Janice Hester-Amey of CalSTRS provided insights into the current agenda of activist institutional investors.
Koppes noted that many institutions have changed some of their stances. “CalPERS now no longer says ‘one size fits all,' he explained, adding that some feel the issue of staggered boards is overblown since most institutional investor groups have staggered boards themselves. Koppes proposed five key governance steps for companies to take to meet institutional desires:
Hester-Amey, who serves on the board of the Council of Institutional Investors, provided additional insights into institutional governance interests. She said that the Council is proposing that a full two-thirds of board seats be occupied by independent directors, that a non-executive chairman be elected if poor performance continues in a company for three to five years, and that any precatory shareholder proposal that receives a majority vote for two consecutive years be put up for vote as a binding proposal in the third year.
The role of the Corporate Secretary as a “value adding” governance advisor is not limited to those who serve in North American companies. In a recent issue of Australian Company Secretary magazine, Graham Stubington, a former CEO of the Australian Institute of Company Directors, expressed his view that the Company Secretary of an Australian corporation has an important role in adding strategic value by providing advice on how the board can assess its own performance and promote continuous improvement. “This is a new function, outside of the conformance role functions [of the Company Secretary],” the article notes. “The increasing emphasis on Board performance means that directors will be looking to the Company Secretary for input into that important performance role of the Board.”
The Secretary's contribution to the strategic adding value role is in four principal areas, according to Stubington: advising the Managing Director and Chairman on board performance processes; developing the annual board agenda to ensure that the critical success factors necessary to ensure sustainable competitive advantage are addressed in a logical manner in the agenda; ensuring that clear delegations are provided to management from the board; and ensuring the terms of reference for the board committees reflect the necessary performance outcomes as required by the board.
The language of the article may be Australian in style, but the meaning is clear: the Company Secretary is in the position to be the company's key governance advisor to both the board and management.
The process of selecting a new director is a simple one. There are three categories of candidates, in a precipitous declining order of preference: (1) current CEOs, (2) former CEOs, and (3) all others.
That is an observation quoted directly from a senior corporate leader who has witnessed the process in action over many years in many different boardrooms. And this is not a comment made 10 or 15 years ago that I recorded for posterity; it was made during a visit to this executive's Madison Avenue office earlier this year.
That is one version of director-recruitment reality, and a long-standing one it is. “Sitting CEOs,” as they are sometimes termed, are undeniably attractive for a board vacancy. The assumption is that they bring with them the leadership quotient and management capability that comes with running a public corporation. Who, after all, has a better skill set and experience base to draw upon than a CEO? He (and it's still most often a he when we're talking CEOs) deals on a daily basis with the operational challenges and shareholder issues likely faced everyday by the CEO who is looking to fill an opening on his board. A CEO knows the tough terrain, has proved adept at navigating it, and, importantly, has the peer-level respect and empathy for what it takes to sit at the top of the corporate pyramid and at the head of the board table.
But not every company can win the CEO sweepstakes. There just aren't enough CEOs to go around to populate every board seat. Too, many CEOs are cutting back on their directorships to no more than two or three. That was one of the specific recommendations made by the National Association of Corporate Directors in its 1996 study on director professionalism. CalPERS, among influential shareholder groups, also favors similar limits. Boards themselves are imposing limits on the number of outside directorships their CEO can take on. CEOs are, and increasingly will become, harder to recruit.
A second version of the reality of the director selection process comes courtesy of a colleague in the search practice. Acknowledging the demands for CEOs and the attendant difficulties in recruiting them to board duty, Dennis Carey, Vice Chairman of Spencer Stuart-U.S. and one of the country's leading recruiters of directors, says the modus operandi is this: When a vacancy opens up, you try to fill it “with the best person with a P&L responsibility.” If not a CEO, then you look for the heir apparent, the executive running a consequential business unit, the acknowledged turnaround leader or change agent within the ranks, perhaps the executive who has run an overseas operation, or another well-credentialed “up and comer.”
A third version of the realities of director selection is that portrayed in the chart below. This is data that shows precisely where new directors recruited during 1997 were found. (The information has been compiled by our editorial staff through research sponsored by Spencer Stuart. The data on new director appointments are published in each issue of Directors & Boards, and then aggregated and updated on an annual basis for publication in a Directors Yearbook.)
As the table shows, despite the common belief that CEOs make up the bulk of new director recruits, they represent only a little over one-fourth of the new board appointments. Following closely on their heels are senior officers, the “P&L” types, who represent almost a quarter of the new board hires. Then the big dropoff comes in the other pools of potential candidates. But still the reality is that 50 percent of new directors are neither CEOs nor operating executives. And, contrary to the elder statesman's view expressed at the outset, the category of “retired executives” is near the bottom of the ranking at 7 percent.
These findings for 1997 are consistent with our prior years' research. In 1996, CEOs tracked a little higher than 32% of new board members, with senior officers at 23%. But for 1995, the ratio was almost identical with 1997 - CEOs at 28% and senior officers at 21% (with retired executives representing 8% of board appointments.)
So there you have it - three versions of where directors are coming from. A CEO will never lack for board invitations. The “up and comers” are increasingly on the radar screen and, either by default (i.e., CEO turndown) or by virtue of their own credentials, are landing enviable directorship assignments. Last, but definitely not least, the “all others” category is still a very vital one - a diverse talent pool from which companies steadily troll for value-adding board members.
New Directors 1997
| Category | No. | % of total |
|---|---|---|
| Chairmen/CEOs | 292 | 28 |
| Senior Officers | 240 | 23 |
| Finance | 130 | 12 |
| Miscellaneous | 111 | 11 |
| Consultants | 93 | 9 |
| Retired | 75 | 7 |
| Academia | 58 | 5 |
| Legal | 36 | 3 |
| Not-for-Profit | 25 | 2 |
|
TOTAL |
1060 |
By Carol Rosen
Ms. Rosen is Senior Vice President of Keane Tracers, Inc., a firm that specializes
in finding lost shareholders. She has participated in several Society seminars
and programs on related topics.
In adopting new “lost securityholder” rules, the Securities and Exchange Commission has indicated that it considers efforts of issuers and their transfer agents to find lost holders to be a priority. The new rules particularly impact on transfer agents, but issuers will also want to keep them in focus.
Rule 17ad-17 requires transfer agents to conduct two separate searches of an electronic database for those security-holders' accounts coded as “lost.” Rule 17a-24 assists the Commission in monitoring the effects of Rule 17Ad-17. It requires transfer agents to file an annual report with the SEC specifying the number of lost securityholder accounts and the number of accounts transferred to states as unclaimed property. The Commission believes that establishing uniform and minimum search requirements will reduce the incidence of lost securityholders and the remittance of investors' assets under state unclaimed property laws.
[Rule 17Ad-17 relates to securityholder accounts lost on or after December 8, 1997. Rule 17a-24 became effective February 4, 1998, with the first report due by August 31, 1998.]
The Commission generally defines a “lost securityholder” as one for whom an item of correspondence is undeliverable. However, if the agent resends the returned item to the securityholder within one month, the transfer agent has the option to delay classifying the securityholder as lost until the item is undeliverable a second time.
Rule 17Ad-17 imposes several important search requirements upon transfer agents. It requires every recordkeeping transfer agent to search for a lost securityholder's current address using at least one information database. The database search must be based on taxpayer identification number (“TIN”). The search must employ the lost securityholder's name if a search based on TIN is not likely to result in locating the owner (e.g., when the TIN is missing or incomplete).
The transfer agent must conduct the initial search any time between 3-12 months from the date the account is classified lost. The transfer agent must conduct a second search for owners that remain “lost” 6-12 months after the initial search. The rules also require that the two database searches be without charge to the lost holder. Professional search firms may be used after the transfer agent has conducted the two required database searches to further the shareholder location effort. Professional search firms may be engaged without the required two searches if the account is exempt from the application of the rule. Examples of exempt accounts are those in which (a) the value of the unclaimed assets and the underlying shares in the lost securityholder's account is less than $25; (b) the securityholder is other than a natural person (e.g., a corporation, other business association or organization); (c) the transfer agent has proof that the security holder is deceased; or (d) the account is coded lost before December 8, 1997.
Along with these search requirements, Rule 17Ad-17 also poses additional recordkeeping requirements upon transfer agents. They must maintain written procedures on how they comply with the rule and keep relevant records demonstrating their compliance for a period of not less than three years (with the records kept in a place that is easily accessible during the first year).
The SEC has not expressly mandated verification of the addresses produced by the database searches but recommends that transfer agents use care before disbursement of a holder's funds or updating master securityholder files.
With approval of Rule 17a-24, the Commission has indicated its desire to obtain better information as to the extent lost securityholders are not receiving assets and to assess the effectiveness of search techniques employed by transfer agents. The Commission requires registered transfer agents to disclose the aggregate number of lost securityholder accounts as of June 30 of each year and the percentage of total accounts represented by such lost securityholder accounts. These figures relate to specified periods of time: accounts lost less than one year, less than three years, less than five years and greater than five years. The Commission is also requiring the number of lost securityholder accounts reported and remitted to state unclaimed property administrators on an annual basis.
To facilitate reporting, the Commission is amending Exchange Act Form TA-2, the annual report of registered transfer agents and has eliminated the requirement that any recordkeeping broker-dealers comply with Rule 17Ad-17.
What will likely be the impact of the new rules on transfer agents and the companies that utilize their services? Transfer agents will need to evaluate:
For issuers of securities, the new rules Establish a minimum standard of due diligence by transfer agents with regard to locating lost securityholders. The responsibility to monitor and manage the impact of the new rule is equal to the challenges recently created by the new postal regulations. As is common with any new mandate, those affected will likely experience a period of adjustment.
Proxy distribution fees, the integrity of the proxy voting process, and new developments to save costs and increase efficiency in the overall proxy process were topics placed under focus during two Proxy Process Forums sponsored by the Society in 1997. The forums, under the joint leadership of ASCS Securities Industry Committee Chairman Larry Menter and institutional investment leader Kurt Schacht of the State of Wisconsin Investment Board (SWIB), brought together an invited panel of representatives from the issuer, investor, transfer, proxy solicitation, and regulatory communities. The larger group has now been divided into a series of working committees which will focus on individual topics - such as the problem of possible double voting of stock on loan, efforts to Establish end-to-end vote confirmation, electronic distribution and voting, how voting decisions are made at institutions, householding and other cost-saving ideas. Plans are to have each committee report on its deliberations at a new Proxy Process Forum to be held during the summer.
Chairing the different working committees are ASCS members Tony Horan of The
Chase Manhattan Corporation (Double Voting); Peggy Foran of Pfizer Inc. (Vote
Confirmation); Rhoda Anderson of Lucent Technologies Inc. (Technology-related
Issues); Steve Norman of American Express Company (Institutional Voting Decisions);
and Larry Menter of The Home Depot Inc. (Householding and Cost Savings). Members
who wish to share specific questions or suggestions for each committee should
contact the individual chairmen or David Smith
in the National Office (212-681-2012 or dsmith@governanceprofessionals.org).
The Corporate Secretary is published throughout the year as a service to members of the Society of Corporate Secretaries and Governance Professionals. Articles or statements appearing herein do not constitute legal opinion, advice or judgment and should not be relied upon as such. Inquiries regarding information contained in this newsletter should be directed to Geoff Loftus, at (212) 681-2000 or by e-mail: gloftus@governanceprofessionals.org. Inquiries regarding membership or publication orders should be addressed to:
Membership Publications Deborah Fox Olga Holmes (212) 681-2014 (212) 681-2015
Society of Corporate Secretaries and Governance Professionals
521 Fifth Avenue New York NY 10175
212-681-2000 - Fax 212-681-2005
membership
| search
| help
| site map
| contact us
Copyright & Privacy Statement
Take
one elegant resort along the Pacific coast. Add four days of business programs,
outstanding speakers, workshops, vendor exhibits, sports tournaments, family
activities, tours, social gatherings and more - and you have the Society's 52nd
National Conference set at an old favorite site, the