A rare opportunity

In a striking similarity to 2004, this year’s annual national conference of the Society of Corporate Secretaries & Governance Professionals (the Society) took place amid a slew of major court cases. Two prominent cases against chief executive officers accused of fraudulent mismanagement were approaching their summations while delegates met to discuss the latest trends in corporate governance and the first full year of Section 404 compliance. 

In the two months since the end of another highly successful conference, Bernie Ebbers has been sentenced to 25 years, Kirk Skelton of Cendant got ten years and a hefty fine, and Scott Sullivan of WorldCom will be wearing prison stripes for five years. These are just a few of the recent verdicts and at the time Corporate Secretary was going to press several others were still awaiting sentencing. 

The severity and timeliness of the above sentences and the presence at the conference of former senior SEC staff and other senior regulators are superb indicators of the importance of effective governance, oversight procedures and the pressure that corporate secretaries and general counsel find themselves under from all sectors. 

A lawyer in the house

The session topics were varied and insightful, but they all had one thing in common: the spectre of legal liability was raised at least once at every meeting. The scene was set after the opening address by Alan Beller, director of division of corporate finance, when he delivered the SEC Update. 

Concerns over liability are prevailing as legal action becomes more common. Tina Van Damm, corporate secretary at Dow Chemical, highlighted during a presentation on The corporate governance professional that ‘There is a great deal more tension between more parties than ever before. Relations between shareholders and boards, boards and general counsel, regulators and companies are strained.’ 

And in the middle of all this is the corporate secretary. Bob Lamm, general counsel at FGIC, introduced the idea of the ‘corporate secretary as scapegoat’ when he suggested that many board members and executives expect too much and are very quick to blame when things go wrong. ‘Boards and audit committees have become guarantors of their company’s financial reporting. This is both very dangerous and extremely scary. It is important to manage expectations in this area. There is an utter lack of time to comply with all the regulatory and governance requirements,’ Lamm lamented. 

It doesn’t look like things are going to get any easier. Twelve months ago, many corporate secretaries expressed concern about the added responsibilities and complications following the introduction of the Sarbanes-Oxley legislation. This year, the first of Section 404 compliance, saw the problem compounded further. 

Corporate secretaries have become, in many cases, de facto governance officers. Stephen Norman, secretary and corporate governance officer at American Express, asked how many people worked at companies that had an officially designated governance officer. Around half the 100 session attendees raised their hands. When asked how many felt governance activities form the majority of their present role only a small minority disagreed. 

A separation of power

It was noted there is potential for a serious conflict when a chief governance officer also acts as general counsel because a person in this position might violate attorney-client privilege when reporting to board directors about the management. For this reason many companies are separating the general counsel role from that of corporate secretary and governance officer. Norman thinks all firms should take this step, saying, ‘I believe at large public companies you must have separate roles in this respect.’ Most people agreed that, if it has not been done already, their company is seriously considering the move. 

Earl Franklin, vice president and secretary at Eaton Corporation, feels the traditional functions of the corporate secretary have changed forever and the vast majority of the major tasks are now governance related. These include counseling the CEO and govvernance committee on best practice, managing the Section 404 disclosure regime, assisting with director education, responding to shareholders and setting agendas for effective board evaluation. 

Brian Lane, partner at Gibson Dunn & Crutcher LLP and former director of the SEC’s division of corporate finance, led a spirited session on Disclosure and reporting challenges that quickly became a debate about materiality. 

Discussion focused on what constitutes a material event and how it should be reported. The problem from the secretaries’ point of view arises if the company takes a decision or a director makes a statement that may be considered material. This would then need to be the content of a new 8-K filing. Given the 48-hour time frame, if the secretary is not ‘in the loop’ it can lead to a great deal of stress trying to get the appropriate filings out on time in order to comply with the rules. 

Materiality led to an active conversation about shareholder-to- board communication and Regulation FD concerns. When asked ‘How many corporate secretaries strongly discourage direct communication between directors and shareholders?’ approximately 75 percent of the room nodded affirmatively. As if to underline the concerns in this area, not one person admitted to encouraging open communications between the groups. 

William O’Shaughnessy, executive director and assistant secretary at Morgan Stanley, raised a point. ‘This is in direct contrast to ISS requirements and SEC recommendations that a lead independent director have direct and regular contact with shareholders.’ 

Overall the conference was thought provoking and challenging. Attendees left having shared useful insights into dealing with today’s governance and compliance regime and a much better feel for what challenges lie ahead. The conversations will resume next year in Boston for the 60th Society conference.