Life in the executive suite is taking a sour turn
BY MATTHEW BENJAMIN
US News and World Report
Money & Business 9/9/02
Risky Business
As chief executive of Pizza Inn, Jeffrey Rogers took home over $1.3 million last year. That doesn't count the generous perks, like a company car and other benefits that came with the corner office. Suddenly, though, after 12 years at the Dallas restaurant chain, Rogers is unemployed. He resigned last month as the company took a $1.9 million charge to offset the cost of an unpaid loan to Rogers, a write-off that erased the firm's quarterly profit.
Fortunes are turning at the other end of the corporate spectrum, too. A smiling Sandy Weill, chairman of Citigroup, graced the July cover of Chief Executive as its CEO of the year. Since then the legendary businessman has been named in a shareholder lawsuit and is reportedly being investigated by New York Attorney General Elliot Spitzer for allegedly pressuring an analyst at Salomon Smith Barney, a Citigroup unit, to upgrade his rating of AT&T Corp., on whose board Weill sits.
Targets. Neither Pizza Inn nor Citigroup executives would comment, but the examples prove loud and clear that it is getting precarious to be an executive in America. The latest evidence: indictments last week against WorldCom's former chief financial officer, Scott Sullivan, and mid-level official Buford Yates for allegedly masterminding the company's $7.2 billion accounting fraud.
After being lionized by investors and the media and showered with money and perks for the past decade, corporate officers and directors are now feeling the heat. It's not just the unprecedented wave of corporate scandals that has chummed the waters–executives are finding themselves held accountable for slumping stock prices and failed merger strategies, as Jean-Marie Messier, the former head of France's Vivendi Universal, recently found out. If the opprobrium of burned investors, suspicious regulators, and opportunistic attorneys were not enough, late-night comedians are taking their shots, too. (Jay Leno: "Whew! It was hot today. It was so hot that you could actually see a CEO shedding his skin.")
"It's become much more taxing and a lot less fun to be an executive or director," says Don Hambrick, a management professor at Penn State's Smeal College of Business.
To many executives, the job may not be worth the hassle without incentives such as company loans or free life insurance (which are now outlawed or may soon be). At least 120 chief executives quit or were pushed out in the past two months, according to Challenger, Gray & Christmas, a Chicago outplacement firm. That's significantly higher than last summer's departures. "They're leaving due to discontent over the increasing government scrutiny and legal hazards of the position," says CEO John Challenger.
Finding replacements is no easy task in the current environment of searching for scapegoats. Several firms, TRW, Dynegy, and J. Crew among them, have struggled this year to replace departed executives. "It's more challenging today than ever before to recruit CEOs to public or private companies," says David Nosal, cohead of Korn/ Ferry International's global recruiting practice.
The same goes for the directors whose job it is to hire new executives. Soon after this spring's tele- vised congressional hearings on Enron, consulting firm McKinsey & Co. surveyed hundreds of corporate directors. Four fifths of them said they felt a real threat of being held personally liable and that the threat had grown over the past year. "The feeling is that while D&O [directors and officers] insurance protected directors' assets in the past, that will not be the case in the future," says Bob Felton, a McKinsey senior partner.
A quarter of the directors surveyed also turned down a new directorship or resigned from an existing one over the past year because of liability concerns. "Everyone is concerned that lawsuits and state regulators have the potential to get out of hand," says Robert Mittelstaedt, a vice dean at the University of Pennsylvania's Wharton School of Business. He serves on the boards of IS&S Inc., Laboratory Corp. of America, and HIP Foundation.
Indeed, after terrorists, executives and directors may be the prime targets of federal crimebusters nowadays. And though the vast majority of them are law abiding, television images of executives being led away in handcuffs are unnerving to those in the executive suites. The Securities and Exchange Commission, which kept a low profile during the first year of Chairman Harvey Pitt's tenure, is now firing on all cylinders. By the end of July, it had filed 130 financial fraud cases, 16 percent more than last year and 44 percent more than five years ago. The understaffed SEC has also sought to bar more than 70 individuals from serving as directors or officers, nearly double the number from 2000. And last month, the SEC made executives swear to the truth of their companies' financial results.
Meanwhile, ambitious state law enforcement officials are not content to let the feds have all the fun. New York's Spitzer has garnered the national spotlight by targeting fraud and conflicts of interest on Wall Street and in corporate America. Other crusading attorneys general, from Connecticut's Richard Blumenthal to California's Bill Lockyer, are right behind him, backed up by millions of angry voters who happen to be shareholders, too.
Private law firms are just as aggressive. After a lull following a 1995 law that sought to curb them, shareholder lawsuits, like the one filed against Citigroup's Weill and Salomon, are back with a vengeance. Some 488 such suits were filed last year, an all-time high. A dozen resulted in breathtak-ing settlements that exceeded $100 million.
As a result of the 1995 law, large institutional investors like state pension funds are frequently the suits' lead plaintiffs. And unfortunately for board members and executives, "institutional investors are more in a position to insist that individuals pay," says Bill Lerach, the country's best-known shareholder plaintiffs' lawyer.
In the most egregious corporate fraud cases, where executives have profited at the expense of shareholders, some funds plan to demand that executives or directors personally feel pain. "If they're not going to contribute personally, we would be inclined not to settle" a suit, says Keith Johnson, chief legal counsel to the Wisconsin Investment Board, the nation's 10th-largest public pension fund.
Money managers like Ralph Whitworth are also taking the initiative against errant executives. Relational Investors, the San Diego-based fund Whitworth runs, holds 7 million Tyco shares and plans to wage a proxy fight to purge that company's board of all directors who served during the era of Dennis Kozlowski. He's the former Tyco CEO who for years allegedly lived like a sultan on company money, using it to pay for lavish vacation villas and extravagant personal expenses. "It was on [the board's] watch that these shenanigans took place," says Whitworth, "and we want to hold them accountable." A similar campaign earlier this year by the AFL-CIO went further, succeeding in getting former Enron board members to resign from most of the other boards on which they served.
Under the gun. Meanwhile, directors at companies with no shred of scandal are finding the work tough going. "Board meetings are taking longer, committee meetings are taking longer–it is a much harder job," says Julie Daum, managing director of U.S. board services practice for executive recruiters Spencer Stuart.
Those who are willing to put in the hours still must face a new level of scrutiny. Frank Renaud, head of the white-collar division at private investigators Beau Dietl & Associates, does intensive background checks on directors, officers, and other potential employees for corporations, and business is booming. "There's more interest in making sure the people they hire are who they say they are," says Renaud, who checks for criminal records, affiliations with other companies, and fraud or harassment allegations–anything that could come back to haunt a company later.
Even the corporate icons of the 1990s are finding themselves on a short leash. The entertainment industry is suddenly rife with questions about the job security of Michael Eisner, now in his 19th year as CEO of Walt Disney. Eisner rehabilitated the company but hasn't been able to boost the sagging stock in recent years, and now Disney is exploring the sell-off of its sports teams, baseball's Anaheim Angels and hockey's Mighty Ducks. And Carly Fiorina, once heralded as Hewlett-Packard's savior, is facing criticism that she wasted too much time and effort on acquiring Compaq Computer. Some academics, such as Harvard Business School's Rakesh Khurana, go so far as to question whether the celebrity CEO era is over.
If so, maybe things will revert to the days when CEOs and their ilk were unknown outside the boardroom and the local country club. And that might just be better for everyone.
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