Editor’s note: This is the second of an in-depth, five-part series that examines the continuing impact of recent scandals on corporations, the people who run them, and the analysts and other experts that report about them.In 1990s, the chief executive job, particularly at a hot tech or e-commerce company, was kind of glamorous. Plenty of CEOs — even those of small companies – had near rock star status and instant name recognition.
In reality, if the founder of a company couldn’t run a company once it went public, it was tough finding an able candidate — a situation that experts say hasn’t changed despite the market contraction.
Will the new regulations make it tougher?
“There are a number of publicly traded companies that already have a hard time filling the CEO spot,” Jim Verdonik, a securities attorney with Kilpatrick, Stockton in Raleigh. To join a small publicly-traded company that is struggling can be like “Buying tickets on the Titanic.”
Triangle’s Tom Staab, who serves as that company’s treasurer, thinks so. “You spend 20, 30 years building a career and you could lose your credibility like that.”
On the other hand, the regulations could have a positive effect on a CEO candidate contemplating joining a firm with a rocky past. If the company has certified financial results (that haven’t been challenged), “That might make it easier to recruit,” Verdonik suggests, if only since his or her toes won’t be held to the fire for past transgressions. Indeed, while Triangle Pharmaceutical doesn’t have past transgressions, the company decided its new CEO hire would not be responsible for signing off on second quarter reports since he hadn’t been at the company long enough to thoroughly understand the finances. Other executives signed the certification.
With so much emphasis on the integrity of the financials will boards be more inclined to recruit someone with law or finance background that keeps the firm on the straight and narrow?
Hopefully not the latter, say people with legal and financial backgrounds.
“The new reforms already lean toward making the board of directors a more legalistic institution. Adding legalistic CEOs would ensure gridlock,” Verdonik says.
Instead, Verdonik thinks companies will stop rewarding the deal making CFOs (Enron and WorldCom’s CFO’s both made CFO Magazine’s “CFO of the Year” for their deal making) and go back to the model of a CFO as the number cruncher and the CEO as the dealmaker.
Personal characteristics, experience, integrity and intelligence, will continue to top the list of qualities board members will look for in a CEO, says Jeff Schulte, a senior partner in the securities group at Morris, Manning & Martin in Atlanta. “(CEO candidates) will involve domain knowledge, experience in running comparable enterprises, and familiarity with the key issues facing the business.
Finding board members — and support
Potentially adding to the CEO’s burden are new rules about who can serve as a board member. The law requires all audit committee members to be outsiders. And one of those committee members should have substantial public audit experience. One firm that recruits directors, Spencer Stuart, recently told the Wall Street Journal it estimates that nine out of 10 director candidates are turning down invitations to sit on a board. The outside board members fear getting sued since they will have added responsibility for the integrity of the company’s financial reports.
The definition of who is an outsider is fairly broad. Academics whose institutions have received donations from a company aren’t considered independent, neither are former employees — unless five years have elapsed. And former partners or employees of outside auditors aren’t considered independent for three years. If a board member has a family member working at the company they aren’t considered independent.
“Getting qualified people is a real challenge,” Schulte says.
“There are people who might have been assigned to a committee who probably decide they don’t want to be on that committee,” says Billy Parker, a partner in the information, communications and entertainment practice at KPMG in Atlanta.
The only people who fit the bill to serve as head of an audit committee are retired partners in public accounting firms, Verdonik says. And with the work entailed in doing the job, few of them will want to take on more than one or two jobs.
“If you have a seven person board and you need all outsiders to serve on the audit committee, you really delete the strategy types,” Martin says. That, in itself, could make the CEO of a small company’s job harder. The CEO would be bereft of a close outsider who could provide ideas and help form strategy.
The added requirements add stress — and some people wonder whether it will really deter financial scandal or just drive the unethical to finding even more intricate ways to cheat?
“Human nature didn’t get legislated away,” Schulte says.
Silicon Valley venture capitalist Tim Draper said in the October issue of Wired magazine that he thinks the regulations create more problems. “With more regulations the bad apples have more ways to “fool” the systems.” His suggestion: Get rid of financial accounting and the board that regulates it and replace it with simple cash accounting. “Cash is cash. There would be no way to hide the facts.”
Ultimately, Verdonik doesn’t believe CEOs and board members need to worry about landing in jail for “honest mistakes”, but “It’s scary.”
Friday: A look at changes in analyst coverage.
Part One: Want To be a CEO? Your Feet Will Be Closer to Fire in Hot Scandal Climate- www.localtechwire.com/article.cfm?u=1970&k=22&I=10