Will ‘Board Secretary’ Role Go Mainstream?

W

hat a difference a few scandals make. Two companies associated with questionable governance practices in the past are now clearing the path for what some hope will become a solid governance practice in the future: hiring a secretary to the board of directors.

Last year, American International Group, stung by its involvement in schemes to rig insurance bids, created the position of vice president for corporate governance and also appointed its new hire, Eric Litzky, special counsel and secretary to the board.

In October, UnitedHealth Group—the poster child for deliberate backdating of stock option grants—went even further, and created an entirely separate secretary to the board. Once the position is filled, the secretary will report administratively to UnitedHealth’s chief legal officer, but on a day-to-day basis will work for, and report to, the board directly.

“The sole responsibility of the secretary will be to support the activities of the board and of its committees, including ensuring that the board’s activities and recordkeeping are in line with corporate best practices,” the company added in a regulatory filing.

At AIG, Litzky reports to the board directly on governance and related board matters, but still provides counsel to AIG in corporate, financial, and securities law.

Neither company would comment for this article. Corporate-governance watchdogs, however, hail the move as a way to sever boards’ dependence on corporate executives for information they may need to make good decisions—decisions that may not always be in step with what the executives want.

Kenneth Bertsch, managing director of corporate-governance analysis for Moody’s Investors Service, applauds both companies. “It seems boards are flailing a bit without staff support,” he says.

Bertsch

Indeed, Bertsch is trying to encourage more companies to follow suit. He and several colleagues recently published a report calling on boards to hire independent secretaries, saying boards often make good use of legal and financial advisers when investigations are necessary, “but have limited direct staff support on a day-to-day basis, except through the office of the general counsel and corporate secretary, who often appear to perceive their primary reporting line to be to the CEO,” they wrote. “We believe a professional board staff position or small unit should be considered, at least at larger companies.”

Moody’s report argues that a board staffer could help manage tasks such as handling recruiters when the board is looking for new directors or executives, or advise the board during special situations. It cites, as an example, the recent board leaks that plagued Hewlett-Packard.

“The HP chair relied on corporate functions for the leak investigation and outside-party involvement,” Moody’s notes. “It is not clear whether the result would have been better with direct professional board staff, but we believe it plausible that such a capacity could have facilitated procurement and more effective oversight of any review or investigation.”

The report also says that an audit committee’s control of the relationship to independent auditors may itself be hampered by the need to rely on corporate staff to manage the external audit firm, including the approval of lead engagement partners and making decisions on alternative audit firms. The report also notes that compensation consultants provide only limited support for compensation committees, and in most cases, the consultants’ independence is unclear.

REPORT

An excerpt from Moody’s report addressing whether boards need more direct staff support follows.

Time for a new model?

In today's environment, with boards under greater pressure to act independently and with good judgment, Moody's considers the adequacy of support for boards of directors for corporate governance at companies it rates, and believes direct staff support for directors is worth consideration. This is not a new idea-since 2003, for example, the New York City Retirement Systems have sponsored shareholder proposals suggesting the establishment of an "Office of the Board of Directors," to assist in director communications with shareholders.

Some companies that have faced governance difficulties have put in new board staff support in the wake of the problems. For example, UnitedHealth Group in October announced it would create a separate position of secretary to the board (a different position than the corporate secretary). The UnitedHealth position's sole responsibility is "to support the activities of the board and of its committees, including ensuring that the board's activities and recordkeeping are in line with corporate best practices." American International Group Inc. (AIG) also has a secretary to the board, although that individual does have some management responsibilities.

We think it would be useful for companies to consider whether establishment of a secretary to the board, with direct and sole accountability to the board, is merited. The board would independently hire, fire and compensate those in that function. We could envision from one to several professionals devoted to board support, depending on company size and perceived need. The unit would be charged with ensuring the board and its committees are sufficiently resourced, have access to unvarnished information on the company, and are better placed to communicate with the company on an ongoing basis and particularly in times of stress. The exclusive reporting line to the board also could facilitate board member willingness to use staff resources when an issue arises, including those that may require coordination with outside advisors.

It is not clear that "chief governance officer" positions that have been established by some companies have the same exclusive focus on reporting to the board of directors, although such a position may be useful, in our view, if it enhances the independent resource available to the board.

Clearly, there are dangers in a model that provides direct board staffing. Foremost among them is the concern that the board steps over the boundaries of management and becomes too embroiled in the company's day-to-day decisions. In such a situation, managers and employees may become confused as to the leadership of the company. However, a board staffing model need not add to this risk if it is implemented with care. From our experience, most directors of large companies are fully aware, in the current environment, that they must chart a course that balances the need for active engagement with key issues of corporate strategy, risk and leadership without becoming micromanagers-in part to preserve their independence. Directors appear cognizant that this difficult balancing act involves ensuring that managers are empowered in their roles and held accountable for their performance.

Another risk is that either the board support professionals within companies are isolated to an extent that makes the role difficult and unproductive, or alternately, leads the individual to identify with the management group despite the reporting line, and provide little advice that would be differentiated from that of existing functional support personnel.

An additional question is whether the benefits are worth the financial costs-clearly a greater concern for medium-size and smaller public companies. This obviously is a valid concern at some point, but we suspect that some directors underestimate the value of an effective board to the company, which can make costs of board support relatively trivial.

We believe in general, directors are likely to make appropriate use of staff support, and not use it to become

micromanagers. Rather, such a function helps directors to be more informed in their roles, able to spot concerns early, and better positioned to act swiftly when action is required.

Source

Do Boards Of Directors Need More Direct Staff Support? (Moody’s Investors Service, Special Comment; November 2006)

“Something is not going right for boards,” Bertsch says.

Patrick McGurn, executive vice president of proxy advisory firm Institutional Shareholder Services, agrees with Bertsch. “If you are going to have an independent board chair or strong lead director, you need to staff it and put in an infrastructure,” he says. Otherwise, a company ends up like HP, with its powerful former chairwoman, Patricia Dunn, leaning on company employees for help when their priorities and loyalties may have lain elsewhere.

McGurn

In the past, McGurn adds, ISS did not consider the use of a board secretary as a best practice for governance. That may change, he says: “We have been talking about it since Hewlett-Packard.”

McGurn says companies could start off by hiring a junior, administrative-type employee or someone who would typically serve as an assistant corporate secretary, such as a junior counsel. Eventually, that position might evolve into a more senior person.

The individual should facilitate dialogue between the board of directors and management, McGurn says, helping to secure critical information from the company and providing directors adequate time to review critical documents before a board meeting.

Opposing Views

Not everyone agrees that a secretary to a board is necessary. Frederick Lipman, a partner at the Blank Rome law firm and a board member of the Association of Audit Committee Members, says a board should have its own means to gather information—but that doesn’t necessarily warrant a full-time secretary except in unusual circumstances.

He believes using board secretaries makes more sense for large companies, mostly those in the Fortune 500. In fact, he argues, most companies would find a board secretary financially burdensome. “You’re putting a whole layer of costs on to the company to perform tasks that can be done by the internal auditor,” he adds.

Bertsch believes a board secretary should be a senior person with a legal background, but does admit the concept might not be necessary for all companies. “It’s easier to be a director of a relatively small, mono-line company,” he says.

Indeed, Geoff Loftus, vice president at the Society of Corporate Secretaries and Governance Professionals, says if a board just wants a confidential recording secretary, a lot of people could fill that role for a modest sum. If the person is expected to perform governance or compliance functions, however, he or she should have corporate secretary or general counsel experience.

And, Loftus warns, such people do not come cheap. He cites a confidential survey that pegs the salary range at $250,000 to $300,000, possibly with stock options piled on top of that. “That’s a very high-priced piece of talent,” he stresses. “For a lot of companies, that is a lot of money.”

Lipman

Lipman also worries that hiring a secretary to the board could create a division between the board and management, which typically has its own secretary. And Loftus sees parallels to the tension that can arise at companies where management and the board have each hired their own compensation consultants. “They could become adversarial,” he asserts.

Adds Loftus: “For our members, it’s a good thing: more job opportunities. But, it makes me wonder from a governance standpoint whether it is useful. I’m curious [to see] what happens at UnitedHealth.”