It’s easy to forget that we’re already years into the Sarbanes-Oxley era of corporate governance.
It’s easy to forget that we’re already years into the Sarbanes-Oxley era of corporate governance. Companies continue to struggle with many of the regulatory changes, including Section 404, which sounds more like code in the penal system – and is viewed as such by many executives. But how these changes have affected the role of the corporate secretary and general counsel has never been quantitatively measured. Until now, that is.
The Society of Corporate Secretaries and Governance Professionals, together with Corporate Secretary, surveyed corporate secretaries, general counsels and other governance professionals to find out how they are adjusting to the new governance, ethics and compliance responsibilities mandated by regulatory changes and other guidelines that set out industry best practices.
This is the first analysis of its kind, and the detailed responses – nearly 400 in all – demonstrate just how much attention is being paid to the changing responsibilities of these positions, and the timeliness of the debate about the most effective (and legal) way to structure the roles going forward. We asked a number of questions centered on the roles that companies have or have not created, or are contemplating, with regard to governance and compliance officers. One theme quickly emerged from the survey: Dedicated compliance and governance roles are on the rise and an increasing number of companies either have separated the responsibilities of the general counsel and the corporate secretary, or are considering doing so.
Creating new roles
Out of all the respondents, 16 percent answered ‘yes’ when asked whether their company has a chief governance officer. Somewhat surprisingly, more than half of the companies (53 percent) have a designated chief compliance officer.
Interestingly, for those professionals who have these roles as a designated job title, few have a specific job description. In the case of governance officers, only 7 percent have a formal job description. This figure rises to 28 percent for compliance officers. Given the importance of these positions, it is surprising that specific and detailed descriptions of their responsibilities are not available.
These are not exactly overwhelming numbers in terms of designated governance chiefs, but that’s missing the point, explains Karl Barnickol, a partner at Blackwell Sanders Peper Martin and a former senior vice president, general counsel and secretary of Solutia.
‘Yes, it’s a small number with chief governance officers, but five years ago the number would have been so small, you couldn’t have seen it if you looked at it under a microscope. It’s still under-represented, but it’s certainly a significant jump,’ says Barnickol, the former national chairman of the American Society of Corporate Secretaries (now the Society of Corporate Secretaries and Governance Professionals).
One of the respondents holding the governance title is John Coburn III, secretary and senior governance counsel at Nike. As the survey results indicate, while most companies still do not have a titled chief governance officer, an increasing number of firms have given the responsibility to the corporate secretary. Coburn formally holds the titled position, in addition to that of corporate secretary.
‘The title is about a year old,’ says Coburn. ‘We created it to recognize that governance and the corporate secretary functions were really different roles, and that the governance position has evolved. We wanted to indicate that concept, and we wanted to indicate that governance goes hand-in-hand with working with the board, which is what the secretary does.’
In his role, Coburn is also in charge of corporate compliance. He handles his multiple responsibilities with a staff of four paralegals, running what he calls a ‘thin legal department.’
‘You could compartmentalize each area if you wanted to, but it seems to me that much of the work in governance, ethics and compliance is so intertwined that if you had separate positions, you would want them in the same office or reporting to one another for efficiency,’ explains Coburn. ‘Since Sarbanes-Oxley, the corporate secretary has been called on to do far more. We also receive more questions from institutional observers, such as ISS, as to how we’re managing governance and compliance, and our office has had to become more of a salesperson in terms of our governance policies and practices.’
Titled or not, most respondents noted that the corporate secretary, in fact, does share in the responsibilities of compliance and governance. Nearly three quarters of respondents (74 percent) answered ‘yes’ to the question: If the corporate secretary does not have a title that includes compliance or governance, does the secretary share in the responsibilities?
Lines of reporting
Ottilie Jarmel, counsel in the capital markets group at the law firm Shearman & Sterling, notes that these roles are evolving, and how they are handled often varies from company to company.
‘In my experience, the roles of chief compliance officer and chief governance officer are typically combined,’ Jarmel explains. ‘A chief governance officer, if there is one, would typically report to the chair of the corporate governance committee and either to the corporate secretary or the general counsel. A chief compliance officer, on the other hand, would report to the CGO, if there is one, and to the general counsel/corporate secretary and audit committee, if there is not. Having a reporting line to the board is important.’
Edwards Lifesciences in Irvine, Calif, has the titled role of corporate responsibility officer, which is held by the company’s general counsel. ‘The corporate responsibility officer has primary responsibility for the business ethics of the company,’ says Jay Wertheim, vice president, associate general counsel and corporate secretary. ‘I have a very large responsibility for governance matters, but I work closely with the general counsel, who is also very much involved with corporate governance matters. I have clear professional responsibility directly to the board of directors.’
The audit committee at Edwards Lifesciences is formally known as the audit and public policy committee, and it is responsible for overseeing the company’s compliance efforts. ‘Governance is the responsibility of our compensation committee, which is known as the compensation and governance committee,’ explains Wertheim. ‘The corporate secretary makes recommendations to this committee for its consideration.’
When it comes to the question of reporting lines for chief compliance and governance officers, the survey responses were quite varied. The greatest number of respondents (24 percent) said the officers report to the CEO, followed by 14 percent reporting to the general counsel. Nearly 13 percent report into the audit committee of the board of directors, which is not surprising given its mandate to oversee compliance with legal and regulatory requirements.
‘I think there has to be a direct line into the board,’ says Barnickol. ‘It’s built into the structure of things these days because the board has a duty to satisfy itself that there is a compliance function, so they really have to have regular reports from the compliance officer, whether to the full board or committee. But there’s a general understanding that this person has to report to the board. The governance officer is someone who is already reporting to the board, as the title normally goes to the secretary or general counsel, who are in the boardroom and interacting with directors on an ongoing basis.’
A deeper motivation
Another question drawing a wide array of responses asked about the motivation behind creating titled or formal responsibilities for compliance and governance officers. The majority wrote that the momentum originated at the board level.
Sox, of course, had a major impact, as did a speech by SEC commissioner Cynthia Glassman, notes Jarmel. ‘Practitioners took note of a September 2002 speech [by Glassman] saying that it’s important for companies to designate a corporate responsibility officer, so someone within the company has ownership of compliance and ethics,’ he explains.
Among the most explicit responses, respondents mentioned three words behind the creation of dedicated governance and compliance roles: Federal Sentencing Guidelines. The recently revised Federal Sentencing Guidelines state that companies should have an effective compliance and ethics program. This puts the responsibility on boards to make sure management implements an effective compliance program. This, in turn, leads to boards wanting a specific person to deal with the issue.
‘Another reason for creating these roles, though to a much lesser extent, is that the SEC told companies a few years ago that, in determining whether to bring an enforcement action or impose lighter penalties, the Division of Enforcement would look to see whether the company had compliance procedures in place to prevent whatever the misconduct was,’ says Jarmel. ‘Also, federal prosecutors will look to see if a company has an effective compliance program in determining whether to bring criminal charges against it. And [based on the Federal Sentencing Guidelines] the responsibility is squarely on boards to make sure there is an effective compliance program. Not that boards want to think about criminal penalties, but they should know that the SEC and federal prosecutors will give credit for compliance. This is not necessarily an affirmative requirement, but it puts companies in a better defensive posture if there’s ever a problem.’
Varied success
Respondents were also asked to comment on the results of creating a compliance or governance position. Here, too, responses covered the spectrum. According to one respondent, ‘While the position looks good to the public, the actual value that the position contributes is very little.’ Another response reported, ‘Initially there was a bit of tension between the compliance officer and management because of the reporting relationship to the corporate governance committee. Over time, that has sorted itself out. We now have a board that is paying much more attention to corporate governance, and the committees are paying much more attention to their mandates to ensure that they complete the necessary tasks. Having one person responsible for this ensures that there are no slips.’
Janice Dobbs, corporate secretary and manager of corporate governance at Devon Energy, says her company has been quite pleased with the results of having a titled governance role, which falls to her. Interestingly, Devon created the role back in 1999, well before the so-called Sox era.
‘The thought was that someone needed to handle the governance of the board and the company,’ says Dobbs. ‘I see compliance and governance as going hand-in-hand. Our general counsel is the compliance officer as far as Sox, as well as for the FCPA [Foreign Corrupt Practices Act] and the company hotline for company insiders. I take care of the insider’s filings and anything else to do with the board. There really is no overlap. I report directly to the board and the SVP of administration.’
Dobbs acknowledges that her role – as well as the early adoption of a governance officer – is unique, but she believes the reasons are very specific to her company. ‘Our president was the corporate secretary before I came on board – so that’s why I also report into the president,’ she says. ‘The board can call me on anything and talk to me directly. We have an open line. I report specifically to the governance committee, and I serve the audit committee. This is absolutely essential. It gives comfort to the board and the assurance that the board will know that the company is keeping up with the matters and keeping the company compliant.’
This year will likely see even more changes as the governance and compliance landscape continues to evolve.
