Editor: Please talk about the current role of a corporate secretary. What factors have affected its development in recent years?
Bertsch: Two factors have changed the corporate secretary’s role: corporate governance has become a higher profile issue, and regulatory requirements are more complicated. While these developments enhance the importance of this role, they also add burdens, with more intense compliance and governance obligations. In a sense, corporate secretaries must overcome the compliance piece in their efforts to establish effective communication with investors on substantive issues of greatest interest, such as say-on-pay votes.
Historically, the corporate secretary has interacted broadly across company departments, but the focus has shifted somewhat toward greater contact with investor relations (IR), in response to higher investor interaction, and with human resources (HR), because so much of corporate governance discussions center around compensation.
Editor: Please provide an overview of broad developments concerning corporate governance.
Bertsch: Dodd-Frank (the “Act”) of course has inspired much discussion and work for governance professionals over the last several years. While most of its provisions do not pertain to governance issues, those that do are significant, and the Act has driven major changes in investor communications and in the way boards operate. For example, it has placed a premium on being able to articulate to shareholders the reasons for combining the roles of chair and CEO or to provide the justification for executive compensation policy.
Irrespective of Dodd-Frank, companies are dealing with the fact that investors are playing a bigger role, sometimes despite their not having the commensurate levels of attention or sophistication to understand and stay on top of company activities and governance policies. Further, some institutional investors assess that it is not worth their time and resources to get fully up to speed; thus, this important contingent may remain uninformed by choice, clearly complicating the governance process.
Corporate secretaries need to manage the company “story” and then communicate it substantively to outsiders, with whom it is challenging to discuss governance in a comprehensive way. At the same time, corporate secretaries must maintain effective governance for the company as an issuer. In recent years, fulfilling these concurrent responsibilities has become a more complex and often very difficult job.
Editor: What’s new for this year’s proxy season? What are the key considerations for corporations in developing their proxy statements?
Bertsch: Last year, some of the biggest companies broke new ground in making the proxy statement an effective communications vehicle, rather than just a compliance document (though, of course, compliance remains a key issue). That trend continues and is spreading for the 2012 proxy season.
We are seeing, for instance, greater use of executive summaries to present the compensation disclosure and analysis, which represents a change toward a more succinct communication style – consciously intended for investors as readers.
Finally some companies are making better use of the electronic form, in which they can take advantage of the online format to link subjects within the proxy statements and create cross references. This format is very useful, especially given the length and complex nature of the disclosures, and it helps readers navigate to the most relevant information for their needs.
Editor: Will political spending be a particularly hot topic this year?
Bertsch: Yes, it is a big shareholder initiative this year, and there are more than 100 shareholder proposals on the topic. While there have been shareholder resolutions of this kind going back to the 1980s or even earlier, the issue became more intense in 2003-2004, when The Center for Political Accountability – including its president and founder Bruce F. Freed plus others – started asking for more disclosure addressing political contributions.
Specifically, political spending requests are becoming broader in scope; thus, disclosures now may include lobbying expenses, and in a few cases, companies are espousing “say-on-political-contributions” vote (which has a kind of parallel in the UK), much like the say-on-pay vote. Whether this particular idea is positive is doubtful, in my view, but broader disclosure has been embraced by a number of companies, although not always to the specifications sought by shareholder proponents. This can be a hot potato for companies.
The 2011 Supreme Court decision in Citizens United, and the upcoming election, have heightened anxiety and resulted in greater disclosure of political contributions, though activist investors may be more worried about potential for “untraceable” contributions than they need be. A broader concern: companies are more often being pushed both by regulation and by this type of shareholder proposal campaign to make disclosures on matters without “materiality” being the determining factor, diverting attention from issues of more central importance for determining investments.
Editor: Please discuss recent case law pertaining to governance issues.
Bertsch: I do not know that I can be comprehensive at all. I found of particular interest the Delaware Chancellor Leo Strine’s decision on In re Southern Peru Copper Corporation Shareholder Derivative Litigation. In a January talk at the Directors’ Forum in San Diego, Delaware Vice Chancellor J. Travis Laster suggested that the decision had lessons for investors and issuers that the Court is willing to reach large awards where there is genuine merit, as opposed to so-called “strike suits,” which often benefit law firms more than shareholders. In this context, by the way, I would say that some observers have made too much of lawsuits seemingly motivated by negative say-on-pay votes, which have not been gaining much traction in court.
While there seems to be no change in kind with respect to governance-related litigation, there has been a lot of recent attention on compensation-related suits, since say-on-pay started, as well as an increase in somewhat frivolous suits resulting in payouts that benefit the firms but not necessarily shareholders.
A related development is the attempt by some companies to set up exclusive jurisdiction – usually, though not always, in Delaware – which investors, and to some extent proxy advisors, have resisted heavily on the basis that it compromises shareholder rights. I think this may be unfortunate from a shareholder perspective, given the cost of strike suits.
Editor: Will the SEC re-issue Rule 14a-11? If so, how can the SEC address the DC Circuit’s objections pursuant to its July 2011 decision to vacate the rule in Business Roundtable v. SEC?
Bertsch: I don’t anticipate re-issuance any time soon. I was not necessarily of the opinion that the rule should have been challenged in the first place. If another economic crisis arises, the SEC may revisit this issue, in which case issuers face the possibility that a new rule may be worse than the original from their standpoint.
In broader terms, the SEC seems to have taken the DC Circuit’s objections to provide stronger cost-benefit analysis seriously, and Chairman Schapiro has adopted a non-defensive, constructive approach aimed at improving the SEC’s economic analysis and generating high-quality cost-benefit reviews. Such action addresses some vulnerabilities implied by the DC Circuit’s decision, and it will serve well should the rule be revisited in the future.
Editor: Please tell us about the Shareholder Communications Coalition and its recent letter to the SEC.
Bertsch: The Shareholder Communications Coalition is an issuer-oriented group now consisting of the Society of Corporate Secretaries and Governance Professionals (“Society”), the Business Roundtable (“BRT”) and the National Investor Relations Institute (“NIRI”). The SEC instituted its original review of the proxy voting system just as Dodd-Frank was being approved, and “proxy plumbing” was a good concept for a process aimed at addressing legitimate issues.
In the meantime, however, the SEC’s attention was distracted by other matters; thus, the Coalition’s letter dated January 12, 2102 is an attempt to advocate for certain policies and stimulate renewed focus on previously raised concerns.
Issuers and their advisors continue to be concerned about the factual accuracy of reports produced by proxy advisory firms, about the lack of sufficient transparency, about conflicts of interests and about potential regulatory methods of addressing these issues. Many Society members have focused on the large issue of factual accuracy, which is difficult to reach from a regulatory standpoint. While the actual outcome remains to be seen, the SEC seems open to the idea of a stronger, more tailored and mandatory system of registration for the proxy advisory firms.
As things stand, investors may not be interested to pay for the very best analysis, so proxy advisory reports often seem to be generated by relatively junior employees who are not truly steeped in the industry or company within a given case. In turn, poorly informed shareholders are a difficult audience when a company needs to discuss critical matters, such as executive compensation, that really affect the life of a corporation. The Coalition’s letter seeks to apply pressure to the process of addressing the reporting integrity issue, though we acknowledge that there are limits to what the SEC ultimately can do.
Editor: In another letter, the Society was among many organizations urging the SEC to weigh the regulatory burdens within Section 953(b) of the Dodd-Frank Act against a cost-benefit analysis. What is the Society’s view on the right balance with respect to pay ratio disclosure?
Bertsch: First, we acknowledge that the SEC has limited options because it is responding to specific statutory language within Dodd-Frank. Suffice it to say that pay ratio disclosure, as framed within Dodd-Frank, is potentially a very expensive compliance process, and the benefits to investors are questionable. Nevertheless, there is some flexibility with interpreting the statute, and we want the SEC to exercise appropriate discretion toward delivering rules and instructions that reduce the cost of compliance.
Editor: Might this be a situation in which the courts become involved?
Bertsch: It may, but it would involve a different sort of judicial treatment than in the proxy access case. While Dodd-Frank permitted the SEC to take action on proxy access without actually mandating such action, Congress is requiring a pay disclosure on pay ratio. While there may be potential challenges available to critics on whatever the SEC implements, at the end of the day, the real issue is the congressional mandate.
Editor: What are some recent developments on the say-on-pay issue? What are the takeaways from the 2011 proxy voting results? Will persistent economic difficulties affect shareholder perceptions on executive pay for 2012?
Bertsch: The first takeaway is that the 2011 say-on-pay votes were not as negative as many feared. A number of big asset managers, in my view, essentially believe they should defer to the board and the compensation committee unless they have a conviction that something is wrong. They do not want to micromanage pay and do not believe that say-on-pay imposes a burden on them to micromanage. This is a valid approach, it seems to me, as it is difficult – probably impossible – for outsiders to second-guess every decision made by the compensation committee. Indeed, shareholders could do real damage to a company’s health through policy interventions that are not thought through.
Second, while proxy advisory firms are clearly influential, the results from last season indicate that their votes are not necessarily decisive. Many investors do not follow the proxy advisory firms in lockstep, especially when presented by companies with compelling contrary arguments (although governance staffs at institutional investors are under-resourced, and particularly at peak proxy season, it can be difficult to get unfiltered attention from investors). So a third and related takeaway is that companies are learning that they can get good results by talking to shareholders directly, rather than relying on secondary communication via proxy services.
Notwithstanding the low instance of negative voting in 2011, it is safe to say that economic difficulties affect perceptions of pay; however, strangely enough, a poor economy may also serve to diffuse the say-on-pay issue by shifting the focus to more fundamental issues, such as overall performance. Shareholders become anxious when they perceive that executive pay is high and company performance is low.
Editor: Have companies, from their own perspective, started looking at compensation differently in light of economic exigencies?
Bertsch: I think there is increased attention to how investors will view compensation decisions and, as suggested earlier, increased attention to explaining compensation clearly. Compensation plays a critical role in how companies function, and it is constantly evolving. The details matter – any general assessment becomes industry- and company-specific very quickly.
One specific area of change that may in part relate to compensation practice is M&A. Economic difficulties tend to inspire both a sharpened focus on the real long-term value drivers and a certain amount of skepticism about some acquisition activity. We’ve seen a slow M&A market, particularly for large acquisitions, and this may reflect more orientation in executive pay design on long-term shareholder value. Despite available assets and a favorable market, companies are exercising more caution these days.
Editor: Please talk about liability risks for senior management or directors. How important is it to provide detailed minutes that show due diligence on the part of the director, particularly regarding M&A transactions?
Bertsch: Liability risks have not changed significantly, though there is increased focus on lawsuits involving executive pay, as discussed above. Beyond that, strike suits continue, the plaintiffs bar remains active and lawsuits have always been part of the M&A landscape.
Regarding minutes, there is a definite trend toward producing long-form minutes that show the board’s due diligence, though debate continues as to the optimal strategy for this process. There is an art and craft to producing minutes, which must be done intelligently and with unerring vision, regardless of the level of detail. By definition, long-form minutes represent a more complete record potentially setting more traps along the way, but they also may create greater confidence overall in the ability to show that the board did its job, particularly in M&A.
Editor: Please talk about upcoming Society events, including the National Conference coming up in July.
Bertsch: The National Conference is being chaired by Douglas Chia, assistant general counsel and corporate secretary at Johnson & Johnson. Doug is an ideas person and something of a futurist, and the theme of the conference is “the shape of things to come,” focusing on developments to anticipate over the next five years. The changing landscape that we will seek to take in ranges from regulation to technology to boardroom dynamics and relations with shareholders, and it includes ever-expanding methods of communication.
The conference will feature 25 sessions and breakouts, 75+ speakers and a number of Washington-oriented topics, such as activity on Capitol Hill and at the SEC. Pollster Charlie Cook will offer his latest thoughts on the outlook for the election, and Vogue editor Bethany McLean will speak on the future of governance from her perspective, both as a student of the 2008 financial crisis (see her book with Joe Nocera, All the Devils are Here) and as the Fortune reporter who was among the first to talk about Enron.
July’s conference will include basic training for corporate secretaries, and then we expect to offer two seminars in the fall on Essentials of the Corporate Secretarial function, as well as our usual three-day seminar in Florida at the end of January 2013. Education is an important function for the Society, and our members are very thoughtful and willing to share experiences and important lessons with others. The Corporate Secretaries International Association (CSIA) is planning to meet in New York in October, which is exciting because it is a relatively new organization and has previously focused its events in Asia.
We also expect to provide more webinars in general, including working specifically with Corporate Board Member, a NYSE subsidiary, to offer a webinar scheduled for June on the topic of board education. Webinars and educational programs are a true value-add for Society members, and we look forward to expanding these programs.