Based on Chapter 43—Riding Between Cars: The Position of the Corporate Secretary, The Handbook of Corporate Governance, Second edition, Richard LeBlanc, PhD, editor (Hoboken, NJ: John Wiley & Sons, Inc., 2020)
Once seen as a job with few critical responsibilities beyond the “care and feeding” of the company’s directors and serving as a scribe at board meetings, the corporate secretary has evolved into a key focal point within a public company and the internal gear-hub of corporate governance.
Introduction
There is a sign on the door at each end of every New York City subway car that alerts passengers, “Riding or moving between cars is prohibited.” The reason for curbing what was once a common practice of city straphangers[1] is… it’s hazardous![2] This may sound crazy, but being a corporate secretary at a corporation can at times feel like riding between cars. How so?
Over the past two decades,[3] we have witnessed an increasingly sharp focus on corporate governance, particularly at public companies. Not just shareholders, but all stakeholders, including politicians and mainstream media, have heightened their expectations for the role the board of directors plays in overseeing the company’s management and how it functions, particularly in its monitoring role. In what at times looks like an epic battle for control over public companies, shareholders have sought more legal rights and say in decision-making at the public companies in which they invest. When shareholders have not been able to gain or assert those rights, they have come up with other ways getting the attention of, and influencing, the board.
Hidden Storyline
One storyline that has been hidden from view during that same period is the expansion of the job of the corporate secretary and the ramp-up in its intensity. Once seen as a job with few critical responsibilities beyond the “care and feeding” of the company’s directors and serving as a scribe at board meetings, the corporate secretary has evolved into a key focal point within a public company and the internal gear-hub of corporate governance. Shareholders have broadened the scope of their demands on boards, and corporate secretaries are now being asked to provide input and advice on areas far afield from matters of the board and traditional corporate law and governance.
The drivers of the expansion of the corporate secretary’s scope and volume of duties and responsibilities largely trace those that increased the demands placed on boards of directors in the wake of highly-publicized corporate failures related to accounting (e.g., Enron, WorldCom, Global Crossing); internal controls and procedures (e.g., Tyco); and risk-taking in the financial services industry (e.g., Lehman Brothers, AIG, Countrywide Financial). The primary responses to these waves of failures came in the form of federal legislation, namely, the Sarbanes-Oxley Act of 2002 and the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, significant portions of which addressed gaps in board oversight responsibilities.
Other regulatory developments contributed to the increased demands on the corporate secretary, including the promulgation by the U.S. Securities and Exchange Commission (SEC) of Regulation Fair Disclosure in 2000, the SEC’s overhaul of its executive compensation disclosure rules in 2006, and rules emanating from Sarbanes-Oxley and Dodd Frank.
Profound shifts in the investment industry, starting in the 1980’s and accelerating dramatically after the 2008 financial crisis, led to large flows of capital into index funds to the point where the largest index fund managers are now the largest shareholders of swaths of companies across the equity markets.[4] BlackRock, State Street Global Advisors, and The Vanguard Group[5] are for director elections, say on pay, and shareholder proposals what California, Texas, and Florida are for U.S. presidential elections. Sure, it’s possible to win without the electoral votes from any of those three states, but it would be pretty hard to pull off.[6]
Through their work on shareholder engagement for director elections, say on pay, and shareholder proposal votes, corporate secretaries have become the primary relationship owners at their companies for these “passive” funds. Senior management at companies that have become more concerned about how the largest passive funds cast their proxy votes on director elections, say on pay, shareholder proposals, and the increasing number of proxy fights threatened by activist hedge funds, have started to understand the importance of the corporate officer previously thought to have nothing more than ministerial duties, like keeping the minute books and affixing the corporate seal.
Occupational Hazards
The cumulative effect all these developments is the heightened profile and importance of the corporate secretary, which in effect has become an office with significant power. That power (whether real or perceived) emanates from the corporate secretary spending more time with their boards and c-suite executives when critical decisions are being made, developing relationships with and facilitating discussions between board members and shareholders representing trillions of dollars of equity securities, becoming a familiar face to the heads of corporate functions of increasing interest to shareholders, and holding the pen in drafting public disclosures receiving more shareholder attention and public scrutiny.
The increased responsibility of the corporate secretary to act as an advisor and liaison for stakeholders with enterprise decision-making power creates a serious occupational hazard for the person who holds that office: the risk of being pulled in different directions by multiple bosses at the highest levels with conflicting interests. Primarily working with the board and the most senior management, and also having a relationship with the largest shareholders, corporate secretaries can feel like they are “straddling”—standing on the gangway between two subway cars with one foot on each. Those two cars are traveling in the same direction at high speeds, connected by what appear to be strong couplers and chains. While it shouldn’t happen, what do you do if that connection system fails and those two train cars start to move apart with you as the only thing left connecting them?
The secretary’s primary function is to ensure the board has what it needs to fulfill its fiduciary duties. He or she is formally appointed to that office by the board of directors and has all the same fiduciary duties as the other corporate officers. In most public companies, the corporate secretary title and responsibilities are held by the general counsel. Yet, the additional work resulting from the increased demands on the board is now hogging more of the general counsel’s bandwidth. As a result, more companies have dedicated or hired a separate individual—usually a lawyer who reports to the general counsel—to serve as the corporate secretary.
What if the general counsel and the corporate secretary differ in their interpretations of the law or SEC regulation as they apply to the actions of the board? When the general counsel is the corporate secretary,[7] this doesn’t happen. When the positions are split, this conflict scenario becomes very possible and can put the corporate secretary in a difficult position. He or she was appointed by the board, but was hired and is employed by management.
What about fiduciary duties? To whom are they owed? In a scenario where management and the board do not see eye-to-eye, who’s “side” is the corporate secretary on? The likely answer is the “corporation’s” side, but when dealing with the actual human beings, is that the board’s side because the secretary is appointed by the board and the board is elected by the shareholders? Could there be a situation where the general counsel wants to swap out the current corporate secretary for someone else, or take the title for herself, but the board overrules her because it likes the current one? Right here we see some ambiguity in who the corporate secretary’s real boss is.
Straddling
Now, let’s tie this to the straddling concept described above. Here is a situation where the uncertainty of the answers to the questions in the previous paragraph can make the corporate secretary feel like they are riding between cars. The corporate secretary includes a piece of information in a packet of materials being sent to the board ahead of a meeting. Upon previewing the materials, the general counsel recommends that the corporate secretary remove that particular piece of information from the packet because the CEO will likely feel it’s “not something that the board really needs to see.” The corporate secretary, however, feels it is something material that the board either would want to see or really should see as part of its oversight duties. After a private discussion with the CEO, the general counsel tells the corporate secretary to leave it out.
What is the corporate secretary to do? Of course, the answer is to do what he or she believes is the “right thing,” but that could easily be a career-limiting move or worse. He could look the other way or pass the decision up the chain for someone else to make, but that’s essentially ducking an issue he has the responsibility to face.
How do you fix this? Some companies have experimented with naming the corporate secretary as “secretary to the board,” making it clear to whom that person reports. This is akin to how the position works in the UK. But, this practice is very seldom seen in the US. Another way is to outsource the position to a third party, such as a law firm. This does happen in smaller companies where the general counsel has neither the bandwidth to perform the duties of the corporate secretary, nor the budget to create a separate headcount for this work.[8] In those instances, it’s typically the general counsel, not the board, who retains that third party, and we’re back in the same place.
Opportunities
With interaction among the board, management, and shareholders continuing to increase, stakeholders’ expectations of boards at all-time highs, and the larger philosophical battle over who controls and has ultimate decision-making power over the corporation becoming more out in the open, the intensity and pressure of the corporate secretary’s job will correspondingly increase.
The challenges on the board and corporate secretary generated by these trends will also create opportunities for corporate secretaries to interact with a broader set of corporate leaders and understand more parts their companies’ businesses and larger business strategy. This may lead to being given more responsibility, like ownership of corporate sustainability and ESG, which will be excellent grooming for positions higher up in the organization. The experience of riding between cars will test and ultimately benefit that person as they traverse the highest levels of corporate America. Just don’t spend too much time looking down at the tracks.
[1] Andy Newman, “M.T.A. to Subway Daredevils: Don’t Follow Trump’s Example,” The New York Times, Apr. 7, 2017, page A24.
[2] Stephanie Pagones and Kenneth Garger, “Man decapitated after falling between subway cars,” The New York Post, Dec. 3, 2016.
[3] Generally starting in 2001 with scandals at Enron Corporation, WorldCom, Global Crossing and Tyco International.
[4] Sarah Krouse, David Benoit and Tom McGinty, “Meet the New Corporate Power Brokers: Passive Investors,” The Wall Street Journal, Oct. 24, 2016 (https://www.wsj.com/articles/the-new-corporate-power-brokers-passive-investors-1477320101).
[5] Landon Thomas, “Vanguard Is Growing Faster Than Everybody Else Combined,” The New York Times, Apr. 14, 2017 (https://www.nytimes.com/2017/04/14/business/mutfund/vanguard-mutual-index-funds-growth.html).
[6] The last time it happened was in 1880 when James A. Garfield (R) defeated Winfield Scott Hancock (D). At that time, there were a total of 369 electoral votes. California had six, Texas had eight and Florida had four.
[7] Corporate governance experts have debated whether the corporate secretary position should be separated from the general counsel position. See Paul Marcela, former Associate General Counsel and Assistant Secretary of Dow Corning Corporation, “Should the Corporate Secretary and General Counsel Roles be Separated?” Private Directors Association Newsletter, Part II: The Corporate Secretary Role in Private Companies, Mar. 2017 and Egon Zehnder International, “Dialogue: Ben Heineman, former General Counsel of GE: The General Counsel as ‘Lawyer-Statesman’ and part of the board culture,” Experts, Legal Professional Practice, Issue No. 3, The General Counsel and the Board, pages 19-20 (2011). For a discussion of the trends in the UK, see Egon Zehnder International, “Insight: General Counsel and Company Secretary – why there is a trend in the UK to split the roles,” pages 15-16.
[8] Thomas J. Dougherty, The Directors’ Handbook, 2015 Edition, page 258.