Rules for a new capitalism: you don't have to be the CEO of WorldCom to know the game has changed. The question is, can you change with it?

Author:Pellet, Jennifer

Does your chair feel warm? As one high-profile leader after another resigns in the face of public scrutiny or succumbs to charges of securities fraud or obstruction of justice, it's clear that CEOs are in the hot seat, now more than ever before. When even Jack Welch, the undisputed heavyweight champ of value creation, is being vilified by disgruntled investors and a scandal-hungry media, no one is safe.

At the same time, efforts to reassure skittish investors with corporate reform legislation and public exchange requirements make the CEO's responsibilities in assuring that his or her firm is in compliance murky at best--and the task of leading a company more complicated than ever.

"Companies are being told to expense stock options without any single standard about how to do it," points out Michael McCallister, president and CEO of Humana, at a Chief Executive roundtable held in partnership with the law firm Foley & Lardner. "It's ridiculous."

In discussing the challenges of coping with the increasingly complex legal and social environment, several CEOs expressed concern that the pendulum will swing too far, breeding a business arena in which executives and their boards choose caution at the expense of risk.

"Sure, there have been some excesses, and they should be corrected," says John Shalam, chairman and CEO of Audiovox. "But I'm very concerned that with all our efforts to regulate, and with all these different rules, we are going to stifle entrepreneurship."

How can today's business leaders take the risks necessary to pursue rapid growth without also chancing the wrath of disappointed shareholders--and potentially devastating legal action? Clear, straightforward communication, CEOs agreed, is the key.

"Most corporations are basically honest, and if people tell their stories the way they tell them to employees--clear, concise and brief--the public will appreciate that," asserts Claude Lamoureux, president and CEO of the Ontario Teachers' Pension Plan. "Simple disclosure will win at the end of the day."

Setting the scene

Gregory Bruch (Foley & Lardner): Looking at the newspaper on the flight here, I saw six articles relevant to today's topic. I saw an article about the Tyco board approving a $45 million severance package for the CFO at a time when he was under a grand jury investigation. Now he's been indicted and criminally charged. The newspaper reported that the Enron CFO may be charged criminally; the assistant to Martha Stewart's broker has agreed to a criminal plea agreement; and executives of agreed to plead guilty to a collusive arrangement with America Online. The WorldGom comptroller has agreed to plead guilty, and the New York attorney general intends to seek or to consider seeking disgorgement of IPO profits from top executives who received IPOs from Salomon Brothers on the theory that it was commercial bribery.

It's an unusual time when you see political risk, legal risk and business risk converging like this.

Clearly, we have a crisis of investor confidence. Whether it's a crisis beyond that is a much harder question--and one Congress, in its rush, has not adequately addressed. Is it a crisis of perception? Is it a few bad apples? Is it insufficient regulation? Do we not have enough enforcement? Or is this simply, at some level, just a harsh reality of a bear market?

We've seen a tremendous amount of regulatory action, including the Sarbanes-Oxley Act and new rules from the New York Stock Exchange and other listing organizations. The states are getting into it. So every public company may potentially have to deal with not just one regulator, but many regulators. The potential ramifications for those who do business in the 50 states are tremendous.

The SEC'S budget for law enforcement has doubled within the past year. Everyone wants to get in on the act now. You will see criminal interest in areas that you never thought would have been criminal. If the facts alleged in these headline-grabbing cases are true, then that's probably not shocking news.

But what should give us all greater pause is the extent to which criminal law enforcement agencies are looking into the business judgment of board members and of management. That's the area that has the potential to paralyze what you're doing and the hope of finding an audit committee member.

We'd all like to think that if you conduct yourself honorably and decently and fairly, you'll never come under attack. But let's not be naive. A time will come when you'll get a call from the government or a plaintiff's lawyer and it will be very unpleasant. At that time you hope that you've had the right systems and people in place, documented everything you've done and conducted yourself properly.

J.P. Donlon (The Dilenschneider Group): What do you anticipate the plaintiff's bar will do?

Bruch: This is a feeding frenzy for the plaintiff's bar. They will use the money they obtain from this the same way they've used tobacco money. The plaintiff's bar is probably an important and necessary evil of regulation. It certainly creates a certain kind of discipline. Not all suits are frivolous. But the plaintiff's bar--and maybe institutional shareholders will help...

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