VideoLegal Unease
The Sarbanes-Oxley Act of 2002 requires corporate lawyers to report evidence of misconduct to the CEO or independent directors. The new law also gives the Securities and Exchange Commission the obligation to set guidelines for company attorneys. The rules have provoked the ire of some lawyers, who fear the regulations could tread on the sacred ground of attorney-client privilege.
"The American Bar Association isn't happy about this," says Ted Sonde of Washington, D.C., law firm Crowell & Moring. He says there's been a running debate between the ABA and the SEC over the role of lawyers at public firms. "The SEC has held the position that they should, in effect, be policemen," he says. "Lawyers don't think they should have that obligation."
In an August speech, SEC chairman Harvey Pitt warned of the new responsibility. "Lawyers for public companies represent the company as a whole and its shareholder-owners," he said, "not the managers who hire and fire them."
For unscrupulous CFOs, that could be an important distinction. In the past, says Sonde, they have been able to keep things from the board. "They won't be able to do that any longer." -- Joseph McCafferty
Corporate Governance
Empty Seats on Board
Back in the good old pre-Enron days, serving on corporate boards was a pretty cushy job--a few meetings, a couple of conference calls, and some fancy dinners for a nice fee and maybe some stock options for your trouble. But these days, directors of public companies are facing a whole new ball game. New rules adopted by the stock exchanges and Congress have heaped new responsibilities and potential risks on corporate directors--particularly members of audit committees. "The days of showing up and nodding off in the corner are over," says Peter Crist, vice chairman of recruiting firm Korn/Ferry International. "There's going to be more work, more scrutiny, and more sensitivity."
And probably fewer people willing to take on the job. A study by executive search firm Christian & Timbers found that estate planners are advising their clients to get off corporate boards because of the liabilities they might face. CEO Jeffrey Christian estimates that Fortune 1,000 companies could lose up to half of their directors in the next year. "People may decide they've worked too long and hard to risk sitting on corporate boards," says Olivia Kirtley, a retired CFO. Not her, though; Kirtley intends to remain audit- committee chair for three public companies.
That seat is the toughest to fill--and the hottest. Not surprisingly, CFOs are the most sought-after candidates for the job. "I have four clients asking for a sitting or former CFO," says Crist.
The candidate pool is also shrinking because companies are asking their CEOs to reduce the number of boards they sit on. And tighter definitions of independence adopted by the stock exchanges are further reducing the number of qualified candidates.
For their part, potential candidates are spending more time vetting companies; they want to make sure there are good corporate-governance practices already in place. When Jeff Rodek, CEO of software maker Hyperion Solutions, interviewed candidates for the company's board recently, they asked about everything from directors' and officers' insurance to how Rodek reacts to being challenged. "It's a big commitment now," says Rodek, who has hired one new director and is looking for another. "It's already difficult recruiting people. We may have to cast a wider net." How about financial journalists? --Andrew Osterland
Maybe Crime Does Pay
From 1999 to 2001, CEOs at 23 companies under investigation by the SEC earned 70% more than other top executives, says the Institute for Policy Studies (IPS).
Outside directors' pay increased by 10.9% in an economically difficult 2001, according to a recent survey by Mercer.
Securities Suits
That Unsettling Feeling
Many of the new reforms look to make companies sitting ducks for more and costlier shareholders' lawsuits. The federal statute of limitations on such cases has jumped from one year to two, and accounting fraud is now labeled a crime, which makes it uninsurable. So how can companies stem the tide of lawsuits? At least one says the answer lies in playing chicken with plaintiffs' lawyers.
"We have sent very strong signals to the attorneys that we don't plan on settling," says Pre-Paid Legal Services Inc. CFO Steve Williamson. "It just puts blood in the water." After settling 97 customer lawsuits for $1.5 million in January 2001, and seeing the ensuing copycat claims triggered by the settlement, the company decided to fight its current cases to the end, including a class-action securities suit related to the restatement of its 2000 earnings. "Although it may make sense from a strict cash-flow perspective to write a check for less than what you would pay in future legal fees, the settlement itself brings on additional litigation," argues Williamson.
So far, the strategy seems to be paying off for the Ada, Okla.-based provider of legal-expense plans. In March, an Oklahoma federal judge dismissed the securities suit with prejudice. Then in August, a major shareholder plaintiff conceded that there was no merit to the case and dropped its $30 million claim.
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