Fifth anniversary

There has been no shortage of significant milestones in the world of corporate governance and compliance since the dramatic and public collapse of Enron in late 2001. This month Corporate Secretary celebrates its own milestone in the form of its fifth anniversary.

Before Enron, one of the most precipitous and talked-about corporate failures in history, few people outside a very select group had ever heard, or much less thought about corporate governance. Apart from the occasional mention of insider trading or gratuitous white-collar crime, the mainstream press dedicated almost no column inches to the opaque topic of governance.

My how times have changed. I challenge anyone to open the pages of a mainstream business newspaper or magazine and not find at least one story relating to governance, compliance, ethics or shareholder relations. There are also many specialty publications solely dedicated to the topics – like this one.

Without going into too much detail, Corporate Secretary was born out of the post-Enron, pre-Sarbanes-Oxley environment. Investors, corporate secretaries, general counsel and regulators were desperately trying to understand the situation that led to one of the most controversial corporate laws in US history, and so this magazine was created.

The business world had been turned upside down and people were looking for answers. Ian Richman, co-founder and president of Corporate Secretary’s parent company Cross Border Publishing, recalls attending what was then called the American Society of Corporate Secretaries (ASCS) national conference and being struck by the need the attendees had for an independent information source that could serve as a forum for corporate secretaries and their peers. There was a definite lack of understanding about what shareholders expected. It was clear then that a publication might be able to facilitate discussion, and thereby provide some much-needed insight into these difficult times.

‘That first year was very interesting, and the magazine grew out of our experience in the investor relations world. As a result of Enron and the regulatory changes that were taking place, governance had suddenly been thrust into the investment landscape. For the first time, compliance structure and governance systems were seen as investment criteria, with stock price dependent on how much confidence investors had in the board of directors,’ he remembers.

It is interesting looking back through those early issues. Many of the topics we covered in the very first issue in July 2002 have an uncanny symmetry to the hot topics of today. The cover story, which was written amid the ongoing collapse of Enron and before Sarbanes-Oxley had been passed into law, was titled ‘The revolution goes on’ and sought to find a cure for what we termed Enronitis. It was a confusing period and it seemed proposals and potential laws were coming at corporate America from all angles. Such governance luminaries as Nell Minow, editor of the Corporate Library, Ken Bertsch, then director of governance at TIAA-Cref and John Biggs, chairman and CEO of TIAA-Cref, Sarah Teslik, executive director of the Council of Institutional Investors, and Peter Gleason, COO and director of research at the National Association of Corporate Directors discussed the merits of various proposals from the likes of SEC, Nasdaq and NYSE.

One of the other hot stories from that issue was a review of the new field of corporate governance ratings. The concept of rating companies based on governance and transparency was very new and certainly not met with universal acceptance.

News of the day featured questions regarding the use of stock options as performance-related pay, mergers in the proxy advisory industry (then in its very early infancy), director independence, majority voting and changes to proxy disclosures. Five years later many of us are still dealing with these same questions, albeit from a different standpoint.

Many of the people are the same as well, although their roles, and in some cases, their attitudes have changed. Some others who appeared in the inaugural issue are Carolyn Brancato, Paul Hodgson, Pat McGurn, David Smith, Harvey Pitt, Charles Elson and Peggy Foran.

Minow recalls those formative times: ‘If you had asked me to predict where corporate governance would be in five years, I wouldn’t have suggested half of what has been achieved. I am surprised by the pace of reform in areas such as director independence and majority voting. At the same time, I never would have dreamed up some of the scandals, like the whole options-backdating debacle.

The birth of an industry

And the growth in media coverage has been astonishing. Who would have thought there would be successful magazines specifically dedicated to governance or that publications like Business Week would have a Best and Worst Boards list?’

It was certainly not an easy process. Led on the editorial side by Anthony Parish and Adrienne Baker, the launch of the magazine was a challenge from the beginning. ‘One of the things I discovered immediately is that corporate secretaries at that time were very guarded when it came to the media,’ explains Baker. ‘With one or two exceptions, they simply weren’t used to being in the limelight and getting people to go on record was almost impossible.’ This has changed to some degree. Corporate secretaries and others involved in governance are constantly being approached by investors and the media and are becoming more comfortable, if still cautious, with sharing information and opinions.

As corporate secretaries have moved more into the governance mainstream, their positions have evolved. Five years ago it was the norm for a single person to be responsible for most of the regulatory filings and governance activities. Tom Sanger,
corporate secretary at Sempra Energy and newly appointed chairman of the ASCS in July 2002, remarked, ‘Each company has only one corporate secretary so it is important for us to be able to come together and share ideas.’ Most large US companies now have a team of people operating in the secretariat and governance space. Some, like TXU, have more than a dozen fulltime employees in the area.

Many things have passed across the corporate secretary’s desk over the past five years, but by far the most significant has been the Sarbanes-Oxley Act. This piece of legislation, hastily compiled in the aftermath of the Enron (and subsequent WorldCom and Tyco) meltdowns, has accounted for more coverage in Corporate Secretary magazine than any other single issue. This is because more than any piece of corporate legislation before, it touches almost everything a corporation does.

Changing attitudes

To begin with there was no shortage of opinion about the possible impact of the new legislation. Most people at the time, including corporate secretaries, were positive about the changes. Of the nine corporate secretaries interviewed in the November 2002 issue of the magazine, eight believed that in most cases they already complied and the codification of Sox would not have a huge impact on the way they went about their business. Many of those have since changed their tune as it became obvious just how expensive and time-consuming certain aspects of the code would be.

Since that time, countless surveys assessing the expense of Section 404 and other elements of Sox have graced the pages of this and other magazines and the numbers run into the hundreds of millions. The worst does appear to be behind us, though.

One element of Sox that almost passed without any comment was the requirement for CEOs and CFOs to certify the veracity of financial reports. At the time few people seemed to think this would be a problem and indeed some of the early filers had entertaining stories about complying with the rule. The first year out only 947 companies were required to comply in what became a test run for Section 302. The company taking the honors as the first to comply – Delphi. They were followed by FedEx, PepsiCo, EDS and Qualcomm.

Mark Michael of 3Com recounts how the first certification from the company bore a Chinese seal. The company has a financial year-end of May 31 and filed its reports August 9. When submitting the paperwork to the SEC the company mistakenly dated the certificate on the day the CEO and CFO signed it as opposed to when it was actually received. Therefore the documents had to be resubmitted, but by that time the CEO Bruce Claflin and the CFO were in China. The certificate was resent and had to be certified in China before being returned.

Such light-hearted tales must seem strange to any of the hundreds of CEOs whose companies have been forced to restate financial statements. Up until the middle of 2006 the average impact on share price resulting from a Section 302 revision was just under 20 percent on the downside.

Perhaps the most popular stories, or at least the ones that elicit the most comment, are those examining the career path and salary of the governance professionals. We have featured a number of these over the years. A 2003 article looked at corporate secretaries who had gone on to become board directors and offered tips for peers looking to do the same. A similar piece ran in the latter half of 2006.

The most comprehensive review appeared in November of 2006 when we examined the pay of compliance officers, general counsel, corporate secretaries and ethics officers in the US and in the UK. The US corporate secretaries stacked up well with figures from the Society of Corporate Secretaries and Governance Professionals showing an average base salary of $177,649. Add to this the average annual bonus or $82,126 and corporate secretaries, particularly those that also hold the chief governance officer title, are among the highest paid executives outside of the C-suite.

Reflecting the changing face of the governance landscape, the magazine has evolved its editorial content and mission to encompass a far broader range of issues. These days Sox is featured much less and has been replaced by ‘bigger picture’ concepts. Embarking on another five years, we anticipate globalization, environmental and corporate social responsibility and strategic risk management will be especially strong themes, as we track the movement toward a unified governance, risk and compliance environment.