Nomination committees are taking their turn in the spotlight, with retail investors and employee shareholders vital constituents
The duties of the corporate secretary are expanding exponentially, and nowhere was that made more clear than at the Society of Corporate Secretaries and Governance Professionals’ annual Essentials Seminar. For three days, conference attendees resisted the siren call of the warm Orlando weather to be guided through the fundamentals necessary for achieving effective entity-wide governance at a modern company. They also attempted to tackle a question with seemingly infinite answers: ‘What does a corporate secretary do?’
Doug Chia, senior counsel and assistant corporate secretary at Johnson & Johnson, kicked off discussions as moderator of the first panel, entitled ‘The basic and not-so-basic role of the corporate secretary: traditional responsibilities, new challenges’. Panel members began the session recalling their initial experiences in corporate governance. When first offered her position at Enterprise Products, assistant corporate secretary Wendi Bickett admitted to feeling ‘flat-out overwhelmed’, while Chia’s reaction at the end of the first day of his first Essentials Seminar several years ago was: ‘There’s so much stuff to do; I have to go back to the office right now.’
As the conference progressed, director election and nomination emerged as a dominant theme. In a clear reflection of the current board environment, delegates devoted considerable time to discussing who should be on boards, what the directors need to know to be effective and, with proxy season just around the corner, how to ensure all director nominees secure the votes they need. Unsurprisingly, risk management and mitigation were also popular topics.
Recent trends such as majority voting, a move from staggered boards to annual elections and a far more emboldened activist shareholder community, not to mention changes to broker voting rules and notice and access, have all combined to make the job of electing a board far more challenging. The basis of ensuring a strong board and getting nominees elected is making sure all directors are getting the job done and are as informed and engaged as they can be. During the session ‘New challenges in shareholder voting’, David Drake, president of Georgeson, told attendees: ‘The role of the corporate secretary has evolved, and it is pretty darn intimidating. The essence of the job is to ensure directors fulfill their increasing responsibilities.’
This session began with advice on how to support and manage a corporate board, and included an overview of board organization, fiduciary duties and securities law liability. For an interesting lesson in fiduciary duty, Ning Chiu, counsel at Davis Polk & Wardwell, suggested that all corporate secretary freshmen read the 2005 Walt Disney court decision. Although the document is 93 pages long, Chiu told participants that it reads like a movie script. It even has testimony from actor Sidney Poitier.
Moving on from the basics, Maureen Errity, director at Deloitte, told attendees ‘the [board] committee of focus in 2010 is the nominating committee’.
With director elections looming in the not-too-distant future and the recent change to NYSE Rule 452, panelists agreed it was important for companies to begin reaching out to both retail and institutional shareholders. There has been much discussion about the retail sector, but this is not the only constituency that needs attention. Companies should also take steps to educate brokers and company employees who hold shares about the importance of voting. This is especially important as both groups traditionally support management nominees and take management’s side on shareholder proposals. Current and former employees can hold a surprising number of shares.
Companies worried about reaching a quorum should ensure a routine item, such as the ratification of auditors, is included on the proxy statement. In addition to reaching out to shareholders and employees, Drake advised companies to study the voting policies of their institutional investors. ‘With research, withhold votes can often be avoided,’ he said.
A word of advice
Institutional investors remain the most important voting constituency for most firms, and on this front Drake counseled engagement with RiskMetrics and other proxy voting advisers. Many institutional investors vote proxies in line with the recommendations of advisory firms, rather than make their own decisions. Conference calls with research analysts and RiskMetrics’ corporate advisory team can help prevent misunderstandings resulting in a ‘withhold’ recommendation, which can lead to problems securing the institutional vote.
For companies that do not receive the RiskMetrics recommendation they are hoping for, Drake provided some reassurance that a growing number of institutions, such as T Rowe Price, are conducting their own research and beginning to change their voting practices, no longer always voting according to RiskMetrics.
Adding to concern over director nomination and election are the SEC’s enhanced disclosure policies regarding director qualifications. Darla Stuckey, senior vice president of policy and advocacy at the Society of Corporate Secretaries and Governance Professionals and former senior assistant secretary at American Express, reports many people asking her: ‘Where in the proxy statement is the new director qualifications section going to be placed?’
It seems most firms are taking a wait-and-see-approach. Dannette Smith, secretary to the board at UnitedHealth and a panelist at the conference, suggested an initial discussion of the nomination process and skills necessary followed by director biographies, concluding with something like: ‘As a result of the director’s experience, he/she has met these skills matrices.’
Unsurprisingly, the regulatory environment was another major focus, as significant change is expected during 2010. Although it is not yet clear exactly what tone the new legislation will take, Errity suggested that ‘Senator Dodd’s Restoring American Financial Stability Act of 2009 has the most traction.’
Dealing with rule makers – or, as one panelist described it, the ‘unglamorous part of being a corporate secretary’ – and the SEC’s rule-making process also came under scrutiny. This is an area of particular concern for boards and corporate secretaries, because it is very difficult to plan for uncertainty.
Fair comment
Both Chia and Mauri Osheroff, SEC associate director of regulatory policy, stressed that the commission is very receptive to the comment process following most new rule proposals. While Chia emphasized that SEC rules should not be formulated according to the way winners are chosen on American Idol, the volume of comment letters can still have an impact.
Osheroff also told attendees the SEC is reviewing the unprecedented number of comment letters it has received on proxy access, and to expect a ruling relatively soon. This process is extremely important, and companies have been urged to continue to submit comments to the commission.
