Open to discussion
In late May, the Lotos Club in Manhattan hosted the third Corporate Secretary East Coast Think Tank, where speakers and participants from a wide variety of corporations addressed the most pressing governance and compliance issues facing US companies today. Panelists included in-house general counsel and corporate secretaries, law firm partners, financial printers and records management experts. Under discussion were issues like the new world of attorney/client privilege and making e-governance doable, which incited some fervent discussion among the 40 governance professionals in attendance.
The first panel of the day, sponsored by Jenner & Block, addressed the vexing and complicated issue of attorney/client privilege in an era of more aggressive Department of Justice (DoJ) investigations. Dawson Horn III, assistant general counsel at Altria, presented a number of real-life scenarios for attendees to debate. He also described how he would parcel out information should the authorities ever come calling.
Joining Horn on the panel was Stephen Ascher, partner at Jenner & Block. Ascher shared knowledge from his involvement in the 2005 federal case against KPMG for marketing fraudulent tax shelters. He highlighted the serious risks faced by in-house lawyers and employees during investigations and prosecutions. He also discussed the importance of using outside counsel to protect lawyer-client privilege in the event of an investigation, particularly in the era of increasingly aggressive prosecutors armed with powers to demand waivers of privilege.
Participants were given significant amounts of time to discuss issues raised by speakers. In response to the privilege issue, one corporate secretary advised relaying the contents of memos to investigators only by phone until a formal request for documents is made. Another attorney suggested general counsel who receive a prosecutor’s inquiries immediately transfer the call to outside lawyers. Discussion also turned to the workability of the selective waiver proposal currently before Congress. Nearly all in attendance supported the idea in principal, but were concerned about the fix fueling even more waiver demands.
Conversation then turned to possibly the hottest corporate governance issue of 2007 – executive compensation disclosure. Expectation among the investing community was high following new disclosure rules. But despite the best efforts of corporate secretaries and others involved in the disclosure process, the results did not quite live up to expectations.
With most proxies expanding to over 100 pages, including on average 15 new tables, there is a lot more information to take in, and to produce. Ron Schneider, director for business development at Mellon Investor Services – sponsor of the session – said he welcomed the more detailed disclosure, particularly in the area of severance and change-in-control payments. He did, however, point out that many people were yet to become really familiar with the new disclosures and he expects it to take some time before everyone feels comfortable with what is being reported.
In the face of the longer and more complicated disclosures some analysts reported resorting to last year’s proxies to try to make sense of this season’s. It was suggested that the same thing occurred, though on a lesser scale, with the last round of SEC-mandated changes in compensation reporting in 1993. Richard Bannister, principal in the executive compensation and rewards practice at Towers Perrin, who was also featured on the panel, suggested that while a great deal of work had already been done there would likely be more to hone over the coming few years.
The SEC may have added to the confusion by making a last-minute rule change in December 2006, changing the way it was asking companies to calculate total pay for the new summary compensation table. It originally asked for the full FAS 123R grant date fair value of stock awards and stock option awards but switched to asking for only the portion of the grant date fair value that was recognized as a cost on the year’s financial statements. Some participants complained that this presents a distorted picture of equity and total compensation and it also makes pay analysis over time and against peers difficult.
In response to media and investor criticism about the length and complexity of disclosure, corporate secretaries explained that greater detail requires greater explanation, particularly in the area relating pay to performance. Most participants explained that while the newly mandated tables were useful in some regards they felt it was necessary to supplement disclosure when warranted. An attendee from a Canadian company that voluntarily complies with SEC standards said she’s steering readers to tables showing what the company believes best represents true total compensation with visual cues. ‘We highlighted the columns we thought were most important,’ she said.
The panelists also assessed how well the new information was being communicated. Consensus formed that, while the disclosure forms part of a single document, they should be designed with two completely different groups in mind: on the one hand, the less sophisticated retail investors and the media, and on the other, investment firm analysts.
This difficult task highlights the need for more effective shareholder communication. One attendee suggested that even if numbers are extremely high, most reasonable investors are happy as long as a plausible and complete explanation is given and pay is tied to performance.
Yet there have been flashpoints over some of the eye-popping sums handed out, particularly in severance packages. ‘Shareholders are asking: if [CEOs] haven’t performed, why are they walking away with the money they have?’ said one panelist, who predicted fiercer negotiations on this point as executives are hired now that investors have more compensation information available to them.
There were attendees whose companies faced down shareholder-led ‘say on pay’ resolutions, including one that was voted down with just a 1 percent margin. The issue, though, is far from dead, according to a panelist. ‘I think we’re going to get some version of say on pay whether it’s from Congress or pressure from investors.’
Where it has been adopted, as in the UK, ‘the experience has been mostly positive,’ he said. ‘There was only one compensation structure voted down in a non-binding vote at Glaxo[SmithKline].’Whether more disclosure is a way to halt soaring pay is still an open question. One attendee reported that his company trimmed compensation for some top executives ahead of disclosure as a way to blunt potential criticism. But a panelist said the reported information just helps other executives make deal points. ‘Every time the government has tried to harness pay, it has gone up,’ said the compensation consultant.
Another ever-present challenge facing corporate secretaries and general counsel on the agenda was records and entity management, discussed in mini-session led by CSC. Panelists Bob Lamm, managing director, associate general counsel and secretary at FGIC, George Massih, general counsel at CSC and Jean Traub, chief counsel, governance and assistant secretary at Capital One Financial considered the place of technology in managing day-to-day records and entity needs.
The panelists and attendees were alternately pleased with and critical of computerization of the corporate secretary’s tasks. Some said they wished for a single technological suite that could fit all their needs while others believe such a tool does not currently exist. Traub said she currently uses at least five different technologies in her work. Technology applications remain varied although most attendees agree that better calendaring and automated notifications of entity filing dates are two useful features. Many others said they liked the improved ease by which board minutes and other important records can be tagged and searched and consequently shared in a secure environment. Take up of such tools is developing slowly, but interest seems to be universal.
The final session of the day, sponsored by Merrill Corporation, saw discussion turn to new ‘notice and access’ rules with the conversation led by Gary Purnhagen, VP strategic planning, Merrill, and Bob Schifellite, president for investor communication solutions with Broadridge Financial Solutions. According to a basic attendee poll, most, but not all companies have already started posting annual reports online, but few had made the decision to go ahead and do the same thing with proxy statements.
The challenge with the new rules is ensuring all shareholders retain their vote and no one is ‘left behind’ by not opting in to receiving hard copy reports. There were some concerns about the appetite among retail investors for online reports but a corporate governance manager at a Canadian energy company said when her company made investors ‘opt in’ for receiving a paper version of the annual report, less than 4 percent wanted to receive hard copy.
Nearly all attendees recognized the considerable cost benefits of online distribution but some cautionary tales were presented. In the short term it is possible that print and delivery costs may increase due to the difficulties in estimating exactly how many reports will be needed. ‘There is a significant cost associated with print on demand and the shorter fulfillment timeline,’ one attendee warned.
Access and delivery may only be the beginning, however. As companies and investors become more comfortable with accessing proxy and other information online it is possible this will open the door for another SEC initiative – XBRL. Purnhagen predicted XBRL filing and e-proxies may soon be mandated by the SEC. Although it would seem at first glance that ‘notice and access’ and XBRL may reduce the need for financial printing, companies will still face significant challenges with project management, data conversion and record tagging. Financial printers are at the forefront of this movement.
Overall, the unique and interactive format of the Think Tank allowed participants and panelists from a variety of industries to share real-life challenges that have occurred at their companies.
Many participants offered up personal accounts, which prompted others to describe similar situations they had encountered. Such conversations between experienced and high profile experts took attendees and their companies a step closer to formulating best practice and solving problems that – in isolation – may have seemed insurmountable.