Firms Paying Heed to the Higher Price of Offenses
In state and federal courtrooms last week, prosecutors told stories of fallen executives treating their companies like personal fiefdoms -- raiding the treasuries, decreeing phony financials and lying to conceal the rot from investors.
The verdicts in the trials of the men who once ran WorldCom Inc., Tyco International Inc. and HealthSouth Corp. are probably weeks away. But corporate America is already serving the sentence for their alleged transgressions.
There are paranoid auditors. Pushy shareholders. Assertive board members. No-nonsense regulators.
“We don’t go golfing,” said Gary Sutton, a member of eight corporate boards, including San Diego-based technology firm Websense Inc. “We don’t have dinner the night before. We come to the meeting. We do business, and when we’re finished, we leave.”
Sutton, who specializes in fixing troubled companies, said that in the old days, “it was a lavish dinner and fine wines the night before, a short board meeting in the morning -- and golf in the afternoon.”
The new boardroom paradigm can be traced partly to the government’s willingness to pursue criminal prosecutions of WorldCom’s former chief executive, Bernard J. Ebbers; Tyco’s ex-CEO, L. Dennis Kozlowski, and its former finance chief, Mark Swartz; HealthSouth’s onetime CEO, Richard Scrushy; and Enron Corp.’s former leaders Kenneth L. Lay and Jeffrey K. Skilling.
Beyond the criminal crackdown, a new system of checks and balances has stirred to life, making it harder to get away with shenanigans. Under the Sarbanes-Oxley corporate overhaul law, which toughened criminal penalties, top executives, board members and even company lawyers are more accountable than in the past.
“Tension in the boardroom has increased palpably in the last two, three years,” said Robert E. Mittelstaedt Jr., dean of the W.P. Carey School of Business at Arizona State University and a member of three boards, including Burlington, N.C.-based Laboratory Corp. of America. “It’s not all bad that it has happened. I think most CEOs have accepted that that’s the way it’s going to be.”
Although the trials underway aim the spotlight at the very top, the new reality is felt at every level in a company. Creative strategies for accounting and tax shelters, for example, are being treated more cautiously than during the stock market mania of the late 1990s.
Few would argue that lawbreaking was pervasive in the corporate world, even at Enron. The infamous executives now on trial may be remembered more as renegades than prototypes.
Nevertheless, the line between right and wrong did seem fuzzy during the booming 1990s, with so many companies under pressure to produce ever-rising profits.
“All somebody had to say was, ‘This is the way it’s done. This is routine,’ ” said Alison S. Ressler, an attorney at Sullivan & Cromwell in Los Angeles. “Nobody in the whole system was saying, ‘What about this? Have you looked at it this way?’ People were looking to approve things. Now it’s no longer an automatic OK.”
Fear of the feds may be the greatest check. Nobody wants to drift onto the radar of the Securities and Exchange Commission or other enforcement agencies that have made white-collar crime a priority.
To comply with the Sarbanes-Oxley law, companies revised a record number of their financial filings last year, in large part because of the extra scrutiny being demanded by the SEC, according to a survey by Huron Consulting Group.
In the same vein, executives and board members increasingly seek hand-holding from lawyers to ensure they are abiding by the rules in such matters as the duties of outside directors.
“The number of our clients that ask us to be present at board and committee meetings is much, much higher,” Ressler said.
Executives also follow legal issues in a way that once might have seemed extreme. When the U.S. Supreme Court made a recent ruling on criminal sentencing guidelines, corporate types followed the matter with interest.
“Our phone rang off the hook,” said Charna E. Sherman, a specialist in white-collar defense at Squire, Sanders & Dempsey in Cleveland. She said clients wanted to know, among other things, whether their companies’ ethics codes would be a factor in their favor if they ever got into trouble.
“People wanted to know ‘What does this mean?’ That isn’t the normal kind of reaction we used to get” to a court ruling of that kind.
Perceptions that enforcement has been stepped up are on the mark. A Department of Justice task force on corporate fraud has obtained more than 500 convictions or guilty pleas since its launch in 2002, many involving mid-level figures who have cooperated with investigators.
“We appear to be in the golden age of white-collar criminal prosecutions,” said attorney Jan L. Handzlik, an expert on white-collar crime with Howrey Simon Arnold & White in Los Angeles.
The trials of the former leaders of WorldCom, Tyco and HealthSouth send a pointed message to the top of the corporate hierarchy, he added.
“A trial in any one of these cases would be significant on its own. Convictions in all three cases would constitute a virtual hat trick in the government’s war on white-collar crime,” Handzlik said.
On the civil side, the SEC -- criticized in the past as having missed big problems -- has been extracting the largest financial penalties in its history.
They include a $750-million settlement with WorldCom (now called MCI) to resolve fraud charges and, jointly with New York Atty. Gen. Eliot Spitzer, a $675-million settlement with Bank of America Corp. and FleetBoston Financial Corp. to resolve charges of abusive trading in mutual funds. And just last month, Marsh & McLennan Cos. agreed to pay $850 million to settle charges brought by Spitzer that it had rigged insurance bids.
Stephen M. Cutler, the SEC’s director of enforcement, said he believed that, for whatever reason, “conduct has improved.”
“If you compare what happens inside boardrooms and in the financial reporting area today with the pre-Enron, pre-WorldCom period, my sense is it is significantly different,” he said. But he added: “We have to continue to be vigilant. The fact that there have been improvements doesn’t mean that all of a sudden we should move on to other subjects.”
The looming question: Will recklessness return as soon as the economy and the stock market take their next big leaps forward?
“It’s like a diet,” said Michael Josephson, a Los Angeles-based ethicist who counsels executives and board members. “We’ve definitely lost 30 pounds. Will we hold it? That’s the test.”
As always, management faces intense pressure to meet revenue goals, to keep up the stock price and to satisfy the demands of Wall Street.
“That pressure is excruciating, and it’s not going away,” said Robert M. Bushman, an accounting professor at the University of North Carolina’s Kenan-Flagler Business School.
Recognizing the temptations that executives continue to face, SEC Chairman William H. Donaldson and others have urged companies to overhaul their corporate cultures so that integrity is truly valued from top to bottom.
“Enron had one of the best codes of ethics,” Josephson said. “They posted it. They made a big deal about it. Only they didn’t really mean it.”
When he holds a corporate ethics session, Josephson tries to connect with the audience by first saying that ethical standards benefit the bottom line -- for instance, by strengthening a company’s image in the marketplace.
Then he shows a slide of a defaced statue that was built in honor of Scrushy, a fallen icon in Birmingham, Ala., where HealthSouth is based. Another slide depicts the suicide note left by J. Clifford Baxter, a former vice chairman of Enron who took his own life in 2002. “The pain is overwhelming,” Baxter wrote.
The purpose of such images is to make managers think beyond routine cost-benefit analysis and consider the personal meaning of their actions. Awareness, Josephson said, may be the greatest long-term safeguard against a new chapter of corporate fraud.
“I’ll get tears in the eyes of big executives,” he said. “It shifts the ground to a recognition that what they do is their legacy to their parents and their children. Very few people are comfortable being scum.”
