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Friday, February 18, 2005

Corporate Governance in the Age of Eliot Spitzer

By Theodore F. di Stefano
www.EcommerceTimes.com
Part of the ECT News Network
02/18/05 5:00 AM PT

If you are an active participant in the corporate affairs of the company for which you sit on the board, you have very little to worry about when it comes to SEC actions, or even class action lawuits. Just keep in mind that directors are custodians of the stockholders' money. They are serving to protect the stockholders, not to protect management.


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These appear to be trying times for officers and directors of publicly held companies. But, are they really? Many people involved on the management and directorate level with public companies are quite leery nowadays. But, should those of us involved with corporate boards and corporate governance be afraid, or just cautious? In my opinion, there is no real need for concern.

Let me explain. I know that the Enron debacle was followed by continuing news of corporate malfeasance. It seemed that almost every day, we learned of more disturbing news about corporate shenanigans.

In a previous article, Serving on a Board After SOX: Opportunities and Perils, I talked about the responsibilities of board members and how they can keep themselves out of trouble by being proactive.


Did You Know the Name Eliot Spitzer Before Enron?
This article will revisit, to some extent, the principles that I put forth which show how a well-meaning director can serve with dignity and effectiveness without being intimidated by untoward and unexpected negative consequences emanating from board service. But first, let's take a close look at Eliot Spitzer's legacy.

If you really think about it, you didn't know who Spitzer (the attorney general of New York) was until a very short time ago. He rose to prominence on the wave of corporate scandals and appeared to be setting a new standard for corporate probity and governance.

Before Enron and people like Spitzer, board members had pretty much free rein to run their companies as they saw fit. Frankly, there was very little accountability. The only time that something hit the newspapers was when the actions of the board were so egregious that people had to sit up and take notice.

What he did, in my opinion, was to help raise the bar for directors and officers and make them more aware of the consequences of intentionally negligent and reckless service.

He was in the right place at the right time. And, from what I've been reading, he'll leverage his new-found fame into a yet more prominent political career. Who can blame him?

Most of the criticism leveled at these high-profile cases was more than justified. The fallout will continue until all of the lawsuits are settled and all of the malefactors are dealt with.

Good Return, Passive Investors
The fact is that the vast majority of investors are more focused on the current value of their stockholdings than on what is going on within the executive suite. In a sense, you can't blame them for this.

They expect the SEC and the company auditors to expose wrongdoing and reckless behavior. The truth of the matter is that the SEC cannot closely monitor all of the publicly held companies. It's an impossible task.

Nor can we expect the company auditors to aggressively monitor and criticize their clients. If they're too aggressive, they lose the client to a more pliable auditing firm.

One major contribution of Eliot Spitzer is that he made directors and officers more aware of what will happen if they ignore ethical corporate governance. This alone, in my opinion, does a great deal to advance good corporate behavior.

Safeguarding Stockholders' Investments
Even though most stockholders are more concerned with the market value of their stock than with corporate governance, they've got to become more active in assuring themselves that affairs are being properly run by those responsible.

How can they do this? Well, they've got to read the material that is sent to them by the company in which they hold stock. They have got to take the time and do at least some perfunctory due diligence.

If they are either confused or appalled by what they see, they have several choices, including: call the investor relations line of the company; and report any apparent malfeasance to the SEC (be sure to make the company officials aware of the fact that you have done so).

Shareholders are asked to vote when they receive the annual packet from the company in which they have invested. They must realize the importance of their vote. We have to think of the responsibility of the shareholder as being quite similar to the responsibility of the voting public. It is, in a sense, the same responsibility that is put on each citizen: be aware of the issues and be sure to vote.

What Should the Director or Officer Do?
Anyone involved in corporate governance must take a proactive role in "running" the business. For directors, this means perfect attendance at board meetings, as well as vocal participation at those meetings. It's OK to be a gadfly, an irritant.

My feeling is that any director who is actively engaged in the ethical monitoring of the overall operations of the company for which he/she serves has very little to worry about when it comes to SEC actions or Sarbanes-Oxley. (Please see my article, Sarbanes-Oxley: Avoiding Its Pitfalls.)

In order for a director to become liable for the mismanagement of a company, the director must be either actively involved in such mismanagement, or close one's eyes to it.

If you are an active participant in the corporate affairs of the company for which you sit on the board, you have very little to worry about when it comes to SEC actions, or even class action lawuits. Just keep in mind that directors are custodians of the stockholders' money. They are serving to protect the stockholders, not to protect management.

The same can be said of corporate officers. They are merely custodians of the corporation that is owned collectively by the stockholders. Therefore, they must act as caretakers and guardians.

Officers should also keep in mind that their compensation, including bonuses, should be the total salary that the board has approved for them. They must not take advantage of perks as a supplement to their salaries.

Nepotism should also be roundly avoided. If an executive has a relative on the payroll, that person had better be performing real services and be compensated according to the "market value" of the services and not by some arbitrary standard.

By keeping in mind the caveats I've addressed for both the directors and the officers of a company, you should not have to be unduly concerned about the "Eliot Spitzers" of this world.

Good Luck!

posted by Brian Moran @ 10:06 AM   0 comments

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