Corporations scrambling to offset image of fraud

It is a time of great uncertainty for America’s business leaders. With corporate scandals reeking of fraud on every newsstand and the risk of personal liability rising, it is becoming more and more difficult to manage a company both literally and psychologically. In the past year, the country’s corporations have learned the hard lesson that it doesn’t take a terrorist attack to topple a company.

?We’re in a time when everyone is trying to figure out what to do,? said Ronald Manka, an attorney at Boulder-based Lathrop & Gage specializing in corporations and securities. The biggest repercussions have been from the Sarbanes-Oxley Act, quickly enacted by Congress in the face of enormous public pressure and signed by the president at the end of July, which will increase federal scrutiny of corporate finances.

?It is a truly monumental change in corporate and securities laws in the United States,? Manka said. ?It will have major ramifications. People are trying to figure out what those ramifications are for them and where the lines are going to be drawn. It will be an evolving process.?

Manka maintains that the current problems haven’t just cropped up recently but have been building over the past dozen years, as certain offices became corporate fiefdoms.

?The ’90s were the decade of the CFO in my opinion,? Manka said. ?They gained a tremendous amount of power, and you had people whose job was measured by how much cost they saved gaining a bigger and bigger influence in the corporation.?

However, faced with current scandals involving Enron, Worldcom and ImClone, business leaders have found themselves forced to take action not only to stem the tide of corporate fraud but to change the perceived environment as well. In addition to a thorough scrubbing of the books, boards are examining the structure of internal compensation and audit committees.

There also has been an increase in the participation of third-party reporting firms, said Manka, which gives ?whistle blowers? a secure way to report corporate wrongdoing.

Other business leaders find themselves in the unusual position of turning down offers to join the boards of publicly traded companies.

?We are finding in our discussions with clients that they are having trouble attracting outside directors to their boards because of increased scrutiny on the board’s performance,? said Jim Iacino, senior vice president for insurance broker Marsh in Denver. ?There’s a realization by outside directors that there is quite a bit of liability involved in sitting on a board of directors, especially for a public company.?

That realization also has led to an increased awareness of directors’ and officers’ liability insurance as well. What had been a standard insurance issue has become a risky proposition for many corporations now operating in an atmosphere where premium increases for such insurance have grown as high as 400 percent.

?Most companies through the years have bought D&O insurance (directors and officers) as a matter of course, so I wouldn’t say companies are now buying it where they hadn’t,? said Iacino. ?There’s obviously a lot more interest on the part of the outside directors, and they’re becoming more educated in the area of their liabilities, which is good. They’re calling us to help them cover that exposure. We’re also getting more calls from clients wanting to know the mechanics of a policy or to buy higher limits to make sure they are covered.?

Iacino and Manka agree that boards are more focused on day-to-day operations and are taking more responsibility for corporate actions.

?The day of the outside director being a rubber stamp for management is over,? Manka said. ?You’re going to see an increase in the amount of time that an outside director feels that he needs to spend. Instead of reading his packet of information on plane as he flies to a meeting, it won’t just be a token thing where he gets paid a couple of thousand dollars to attend a meeting. They’re going to expect that they have real responsibilities that require genuine participation and work.?

Unfortunately for the ethical companies that make up the majority, the new rules require expensive and time-consuming procedures to fix the holes that exist. The new rules have some ambiguities that will require additional time and legislation to correct.

?For the companies that are subject to the new law, the line is fairly well drawn,? Manka said. ?For the smaller companies, those rules will have to evolve. That’s one of the reasons companies may be reluctant to say what they’re doing right now because they may not really know.?

Chief executives and boards will have to take more responsibility not only for the financial health of a company but also for its morale, said Marshall Colt of Corporate Psychological Management LLC in Denver. His company’s leadership programs train business leaders to take stewardship over the health of a company.

?Business leaders need to encourage employees to come forward with bad news. If they can pull that off, they’ll be way ahead of the game,? Colt said. ?There’s a certain amount of creativity in coming up with these things, but any kind of demonstrative statement that a CEO can make about his or her renewed commitment to ethics is something they can do to make things better.?

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