Get real with your real estate dealings: as federal regulators continue to expand the reach of Sarbanes-Oxley, directors and CEOs who sign off on conflict-ridden real estate leases may find themselves facing enforcement actions.

• Author: McCormick, James L III.
• Position: LIABILITY AND LITIGATION

ENRON AND ITS PROGENY caused a dramatic shift in the regulatory paradigm for American business. The excesses of off-balance-sheet financing, blatant conflicts of interest, and directorial inaction on which Enron helped focus global attention prompted Congress to pass the Sarbanes-Oxley Act (SOX), with its tough transparency and stricter internal corporate control standards.

Given the relatively recent proximity of those events to today's business environment--SOX is still in its infancy--it is critical for American companies to focus on avoiding costly conflicts of interest that can permeate their organizations or taint their transactions.

At the heart of every scandalous story of corporate misfeasance emanating from the Enron era has been an inability to detect and avoid questionable practices. Yet at many corporations, conflicts of interest still routinely infect many transactions, including the seemingly routine business of leasing new office, commercial, or manufacturing space.

Leasing is a huge, but little-known, area of doing business. Office and industrial rents total $288 billion a year in the U.S. (see accompanying chart), and current leasehold liabilities total a whopping $1.4 trillion. But many companies and boards pay little attention. Boards typically don't raise questions about a company's leasing arrangements and may be unaware of expenditures and questionable practices.

In typical corporate real estate transactions, companies retain real estate brokerage firms to represent them in lease negotiations. But the same firms that are retained to assist corporate clients often simultaneously represent the landlords sitting on the other side of the bargaining table. Indeed, as a pragmatic matter, there often is no other side of the table, because these brokerage firms usually owe far more financial loyalty to landlords than they do to their corporate tenant clients.

In the crosshairs

That is a blunder that can put directors and C-suite executives directly in SOX's crosshairs. Directors and managers who continue to turn a blind eye toward real estate conflicts within their organizations are, therefore, taking a grave--and potentially very expensive--risk.

Even before the advent of Sarbanes-Oxley, wasting corporate assets in this manner in the real estate arena was intolerable and a potential breach of fiduciary duty. Since the passage of SOX, board members and senior managers face an increased likelihood of federal regulatory exposure (not to mention...