Enough penance for corporations?

Public ire and lawmakers' fury in '02 led to broad reforms - and more are coming.

2002 was a year of corporate scandals with details so bizarre they seemed like satire.

The year just ending featured a CEO (Tyco's Dennis Kozlowski) alleged to have pilfered $170 million from his company, including a $15,000 poodle-shaped French antique umbrella stand.

Also on display: a corporate cost-cutting legend (former General Electric Chairman Jack Welsh) whose angry wife revealed his retirement package included a $9 million annual pension, round-the-clock access to a Boeing 737, and company-paid memberships to multiple golf clubs.

The corporate excesses unearthed in the new year may not match those revealed in 2002. But experts do expect significant action on corporate governance.

On the regulatory front, there will be the slow, tough work of implementing reform plans adopted this year by Congress, by the New York Stock Ex- change (NYSE), and by some individual companies.

On the legal front, the pace of courtroom activity also is expected to increase. A Justice Department task force has more than a score of investigations underway into alleged wrongdoing at Enron, WorldCom, and others. More fraud cases are expected as prosecutors methodically work their way from corporate underlings to corner-office holders.

Seeking to restore confidence in the markets before the 2004 election, the Bush administration has said the Justice Department will take a harder look at prosecuting advisers - bankers, lawyers, and accountants - who may have been complicit in corporate wrongdoing.

Meanwhile, state prosecutors - such as New York's Attorney General Eliot Spitzer - are focusing on corporate misconduct. And experts expect more civil suits as individual investors seek to recover lost investments.

The lengthy list of business follies in 2002 hammered confidence in corporate ethics and governance. The climate of distrust is one reason the Dow Jones Industrial Average will register its third straight yearly decline - the first such string of declines since 1941. The Standard & Poor's 500 stock index is also down for the third year in a row - for the first time since the Depression in 1932.

"Confidence in US corporate and financial industries has been seriously eroded," incoming Securities and Exchange Commission (SEC) Chairman William Donaldson said.

As 2003 dawns, US companies clearly face a significantly changed legal and regulatory climate. But governance experts say it is far from clear whether enough has been done to fix problems that have shaken confidence in the honesty of the markets.

"Obviously attitudes have changed in board rooms and, to some degree, among chief executive officers," says Paul Volcker, former chairman of the Federal Reserve System. The question, he says, is whether the response "is a kind of temporary reaction to all the recent publicity or whether it is lasting change. I think there is still a lot of denial around."

"I think we are moving in the right direction ... [but] we are far from being there yet," says Nell Minow, editor of Corporate Library, a business research group.

So far, the public appears skeptical about the corrective actions taken to date. A poll funded by the Securities Industry Association found only 26 percent of investors surveyed expected congressional reforms passed in 2002 to reduce fraud.

And a recent Wall Street Journal survey of investors around the world found Americans more wary of stocks than their European counterparts. In the past six months, nearly one in five Americans had sold or bought fewer shares than in the past.

Perhaps the most significant change in the climate surrounding corporate governance comes from the Sarbanes-Oxley Act Congress passed in July. It toughened penalties for accounting and securities fraud, provided federal protections for corporate whistle-blowers, established a new accounting oversight board under the supervision of the SEC, and required executives to certify financial results.

But while new legislation is in place, its implementation remains a challenge. William Donaldson will face tough questioning in his January confirmation hearings for SEC chairman. The accounting oversight board created by Congress has lacked a chairman after former CIA and FBI Director William Webster was forced to resign.

The private sector also has taken steps to improve corporate governance. In June, the NYSE introduced its own reform plan. It requires shareholders to approve corporate stock option plans, increases the role and authority of independent directors, and mandates regular meetings of nonmanagement directors. But the NYSE plan has not been formally adopted.

"The reforms proposed by NYSE for their listed companies are far more effective and far-reaching than Sarbanes-Oxley," notes Minow. They will require changes in as many as three-fourths of all corporate boards. But she notes that when the NYSE provisions are adopted "it will be as long as two years before they are implemented."