Consequence Change for CEO Crime
82 percent of corporate executives admit to cheating at golf and 72 percent believe that golf and business behavior parallel. - Starwood Hotels survey
The founder of Adelphia Communications is arraigned on securities and wire fraud charges. WorldCom executives temporarily trade their cufflinks for handcuffs due to accounting manipulations that lead to the company's bankruptcy and probably to the personal bankruptcy of many innocent employees. The ex-CEO of Imclone Systems is accused of insider trading. Tyco International's CEO, who allegedly used company money to buy art and other personal investments, is arrested for tax evasion. Enron executives are indicted for hiding debt and inflating earnings, and AOL Time Warner chiefs also stand accused of "creative" accounting. Still, these top executives receive platinum parachutes despite their nefarious behavior, as their employees are pushed empty-handed from the plane.
Political pundits, trial lawyers and business specialists seem to agree that the existing consequences for such selfish behavior must be changed in order to regain the trust of the American worker. Of course, the baubles and power that money buys are the obvious rewards for packing one's private payroll, but the behaviors that earn such rewards have also been systematically supported by the consequences of our political and legal systems.
For example, remember the S&L scandals of the 80s? The average jail sentence for corporate criminals at that time was three years. Michael Milken served less than two years and paid a hefty fine, but he's still worth $800 million today. Ivan Boesky and Charles Keating, his peers in corporate greed, aren't hurting either. According to USA Today, Boesky won $20 million, a $2 million home and $200,000 per year for life in a divorce settlement and Keating is financially set at his chosen abode in Phoenix.
Meanwhile, Money magazine reports that today's CEOs make more than 500 times the salary of the average worker.To restore the reputation of American business, people in the world of high finance and litigation recommend enforcing some real-life consequence changes. Lou Dobbs, anchor and editor of CNN's Lou Dobbs Moneyline, suggests stock option reforms [Money September 2002]. He contends that allowing CEOs huge stock option grants has encouraged an emphasis on short-term results. He urges the current administration to require that all companies treat and report stock options as an expense. Dobbs also demands that corporate swindlers be deprived of the earnings and assets made from fraudulent actions and that they serve a long time behind bars. (So far not one Enron executive has been sentenced, though a year has passed since the scandal broke.)
Lawyers suggest that the Private Securities Litigation Reform Act of 1995 should be drastically altered. That law limited shareholder suits against auditors and others. The passing of the act can also be attributed at least partially to greed in high places - the law was passed after business and accounting lobbyists contributed large sums to certain congressional campaigns. According to David Casey, president of the San Diego trial lawyers group, this law alone gave such huge immunities to accountants and executives that it has contributed more than any other factor to the sorry state of corporate affairs today.
Nell Minow, veteran shareholder activist, has come up with a strategy that starts in the boardroom. She contends that the main skill some CEOs look for in selecting board members is not ability or financial smarts, but the tendency to nod, smile and say yes. The zealousness of board members to get along is the very trait that allows some CEOs to get away with less-than-legal policies that cripple companies. Minow is currently developing a database of information on boards and individual board members that includes a rating on their service effectiveness and accountability. Joseph Nocera of Money, commented on Minow's new project as follows, "It's a great idea - a market-based solution to bring about behavioral change.
"During the periods for which their companies are being investigated, CEOs took in the following amounts in bonuses, stock sales and company loans:Kenneth Lay of Enron -- $184 million (1997-2001)Scott Sullivan of WorldCom -- $45 million (1999-2002)Dennis Kozlowski of Tyco International -- $332 million (1999-2001)Gary Winnick - Global Crossing -- $123 million in stock sales alone (2001)
Data from SEC, Thomson Financial
