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Enemies of a CEO?

From muckrakers to fraud examiners to independent directors, corporate chiefs face pitched battles on many fronts. Here's how to deal with nine of the most common.

If personal investing was America’s passion in the high-flying ’90s, CEO bashing has surely supplanted it at a time of plunging stock prices and appalling scandals. Never before have corporate chiefs faced so much criticism on so many fronts. Believing in the adage that it’s always best to know your enemies-even those who can actually help by broadening your perspective and keeping you honest-Chief Executive decided to explore just who is leading the charge and what they hope to accomplish.

For starters, perennial adversaries of corporate America-union bosses, muckraking journalists, class-action lawyers-are attacking with striking vigor. These critics consider the collapses of Enron, Global Crossing and WorldCom, not to mention arrests of executives at Adelphia and Tyco International, as evidence that the current system of corporate governance is flawed. They’re pushing for a host of reforms, including: dividing the roles of chairman and CEO; giving automatic board seats to stakeholders in labor and the local community; and bridging the widening pay gap between chief executives and average workers.

At the same time, corporate scandals have spawned newer foes (again, using the term loosely). They include certified fraud examiners: namely accountants, auditors and investigators specially trained to pore over financial documents and interview employees to pinpoint the source of fraud. Then there are independent directors who, through perseverance and politesse, can convince even a rubber-stamp board to reverse course and oust its CEO. Even workaday members of the general public, after seeing their stock-laden pensions and mutual funds shrink, consider CEOs a public enemy. At firehouses and Little League fields, they curse executives who cook their books. Why invest in the stock market, they tell one another, when you can’t trust the decision-makers who drive it?

Congressional investigators also have carved out a role as watchdogs of Wall Street, as shown by their tireless probe of Martha Stewart. And having passed the Sarbanes-Oxley corporate reform act, House and Senate panels plan to vigilantly monitor its effectiveness and oversee its enforcement by the Securities and Exchange Commission.

And then there are enemies driven by a single, deep-rooted cause-groups such as animal rights activists. Last year, the People for the Ethical Treatment of Animals went so far as to sue the venerable Ringling Bros. and Barnum & Bailey Circus, accusing its star animal trainer of abusing an elephant (see “The Greatest Show on Earth,” p. 44). And who can discount the threat of terrorists, an insidious, unpredictable force that, with a single well-planned attack, can bring entire industries, like airlines and travel, to a halt?

As the Ringling case shows, some embattled CEOs have begun to fight back. Kenneth Feld, CEO of the circus’ parent company, Feld Entertainment, lashed out at PETA, placing a full-page open letter to the group in major newspapers, challenging its leaders to disclose how much they spent on “politically motivated lawsuits” and “violent and sexually titillating ads.” While Feld’s campaign triggered a counter attack by PETA, it also inspired hundreds of supportive letters and emails. As one leading crisis management expert saw it, the fight between Ringling Bros. and PETA heralded a sea change in the relationship between activists and the companies they target, one that continues to play out.

The following are highlights from interviews Chief Executive conducted with some of the fiercest enemies of CEOs, in no particular order. Consider them talking points (and lessons for errant CEOs) on current and future battles.


Independent Directors

Attempting a hostile takeover of a smaller competitor called Circon, U.S. Surgical gained two seats on the company’s board in 1997 by soliciting a proxy and appointed Charles Elson, an outspoken shareholder advocate, to fill one of them.

At Circon, Elson and his fellow dissident-an 84-year-old retired Marine Corps lieutenant general named Victor Krulak-had their work cut out. They joined a seven-member board that had long supported management and was fiercely resisting U.S. Surgical’s $221 million bid. Circon’s board, led by CEO Richard Auhll, insisted the company should remain independent.

But Elson and Krulak saw things differently. The surgical products industry was capital intensive, requiring vast distribution networks, they argued. At the same time, it was consolidating, Elson recalls, leading him to believe Circon would fare better if acquired by a larger player. On top of that, he adds, U.S. Surgical had offered a generous cash bid of $18 a share.

Over the next two years, by politely but assertively asking question after question about the company’s strategic plan, Elson and Krulak won over two of the other five directors. Now they had a majority. First they ousted Auhll. Then they negotiated a takeover, not by U.S. Surgical, which had been acquired by Tyco, but by Maxxim Medical, which paid $15 a share.

“As a dissident, you’re not always ignored,” notes Elson. “If you make your point in a coherent, cohesive and respectful way, you may have a positive impact.”

One of the keys to the Circon case proved to be holding executive sessions without the board’s two insiders, Auhll and his CFO. “We could talk candidly with each other about where the company was going,” Elson says.

Elson, 42, has gone on to a thriving career in corporate governance. He serves on the boards of four major companies: Sunbeam, based in Boca Raton, Fla.; Nuevo Energy, a Houston-based oil and natural gas explorer; AutoZone, the No. 1 auto parts chain in the U.S., based in Memphis; and Alderwoods Group of Toronto, the world’s second largest funeral services provider. In addition, he directs the University of Delaware’s Center for Corporate Governance, where he teaches both undergraduates and MBAs, and gives speeches to business schools, law schools and such organizations and agencies as the Conference Board and the Federal Reserve.

On the whole, Elson believes corporate boards have improved considerably over the past decade or so, despite the egregious lapses at Enron, Global Crossing and other companies marred by scandal. Spurred by pressure from institutional investors, he says, more boards are comprised of outside directors who increasingly have meaningful equity stakes.

“The board’s job is to monitor management for shareholder benefit, and hire and fire management for shareholder benefit,” says Elson. “You can’t really be a good monitor and do your job unless you’re independent.”


Congressional Investigators

Representative Jim Greenwood had no idea what lay ahead of him when the 107th Congress began in January 2001. As a member of the House Energy and Commerce Committee, the low-profile Pennsylvania Republican expected to focus on such issues as bioterrorism and public health.

All that changed last fall when the Enron scandal broke and a subcommittee on oversight and investigation-chaired by Greenwood-began tackling corporate fraud. But it wasn’t until allegations of insider trading by Martha Stewart surfaced the following June that Greenwood became widely known as a CEO watchdog in the Capitol.

Known as soft-spoken and politically moderate, the 51-year-old Congressman now made headlines with his candor. He questioned Stewart’s claim that she had an agreement to sell her shares of ImClone Systems, a biotech company founded by her friend Samuel Waksal, if the price fell below $60. If she had such a preexisting order to sell, he asked, why were her brokers “desperately” trying to reach her the day before the Food and Drug Administration rejected an ImClone cancer drug? He went so far as to say that he fully expected Stewart to “plead guilty to something.”

While some have applauded Greenwood’s outspokenness, others criticize him as being media hungry. In mid-September, when the committee turned its probe over to the Justice Department, one of Stewart’s lawyers, Robert Morvillo, announced he was pleased the case would now be handled by “professional law enforcement authorities” that were “trained to conduct a responsible and thorough investigation.” An editorial in the Financial Times called the committee a bunch of “clowns” who had succeeded only in wasting tax dollars, marring Stewart’s image and costing her company’s shareholders lots of money.

Undeterred, Greenwood defends Congress’ role as corporate watchdog. “The Justice Department moves very slowly,” he asserts. “I’m not suggesting they shouldn’t. In order to arrest people and prosecute people, you have to do an incredible amount of detailed work.” But, he’s quick to add, “If it had not been for our Congressional hearings, the American public would be sitting here a year later saying, €˜Isn’t anything going to happen to these guys?'”

Greenwood believes Congress has a crucial role to play in Wall Street reform. Not only did federal lawmakers pass the Sarbanes-Oxley Act, he says, they must gauge how effectively agencies like the Securities and Exchange Commission and the Justice Department enforce it. And having pursued Enron and ImClone, Greenwood said in late September, the Energy and Commerce Committee planned to move on to accounting irregularities at Global Crossing and Qwest Communications.


Union Chefs

Leo Gerard, president of the United Steelworkers of America, was born into a union family. His father, a hard-rock miner in Sudbury, Ontario, took him to his first organizing drive at age 13. Other nights, Gerard would stand at the top of the stairs at home and listen as his father and other local union leaders talked strategy in the basement. (Ironically, at the time his father, a member of the Mine, Mill & Smelter Workers, was vying with the steelworkers to organize Canadian laborers.)

But even with such an upbringing, little did Gerard know what he would witness and appropriately rail against decades later: billion-dollar conglomerates collapsing under phony accounting schemes that stuffed executives’ pockets and, in the end, cost thousands of workers and pensioners their livelihoods.

“Left to its own devices, capitalism destroys people,” proclaims Gerard, now 55. “You’ve got to take the rough edges off if it’s going to succeed.”

With that in mind, Gerard is pursuing battles on several fronts. Early this fall he joined other labor and human rights leaders in demanding that Congress curtail imports of goods produced in sweatshops abroad-in violation of the manufacturers’ own codes of conduct. And although the steelworkers find themselves on the same side as corporations in pushing for strong tariffs on imported steel, Gerard refuses to bend to companies’ desires to scale back wages, benefits and pensions in an effort to save the industry. Three out of five surviving “big steel” companies are now in bankruptcy, as the long-declining industry reels from foreign competition. Gerard believes “humane consolidation” is a must, but he doesn’t think the industry can manage that.

On a broader level, Gerard argues that the U.S. economy should adopt a European model of corporate governance. The roles of chairman and CEO must be divided, he says, and corporate boards should have automatic seats for labor and, in some cases, the local community. “If I’m the union representing workers at Boeing,” says Gerard, citing one example, “I have as much stake in Boeing’s success as any shareholder does and should know what’s going on.”

In terms of the role CEOs have played in the recent scandals, Gerard says that “morally, they know better.” The discrepancy in compensation for chief executives and average workers he considers “perverse.” “There are regions of the world where corporations are run well, certainly as well as they are in America, and CEO compensation relative to the base rate compensation of the worker is 15, 20, 25 times,” asserts Gerard. “I don’t know what the magic number is, but I certainly know it’s not 400 or 500.”


Fraud Examiners

No one would argue that all CEOs are white-collar criminals, not even the most ardent anti-capitalist. But, asserts Toby Bishop, head of the Association of Certified Fraud Examiners, the psychological profiles of CEOs and white-collar offenders are strikingly similar.

To bolster his point, Bishop cites a portrait of white-collar criminals from A Mind to Crime, a controversial 1995 book linking criminal behavior to chemical imbalances in the brain. The profile: charismatic, aggressive and arrogant to the point that they are seldom embarrassed by legal, financial or personal problems, seeing them as temporary setbacks and the result of bad luck or an unfair or incompetent system.

“When you read about CEOs who have been looting corporate coffers to pay for lavish personal expenses,” says Bishop, “this description seems to ring true.”

Bishop’s group, based in Austin, Tex., is the largest anti-fraud organization in the world. Founded in 1988 by a criminologist and former FBI agent, it boasts 26,000 members worldwide. Its ranks include accountants, auditors, investigators, attorneys and educators, among others, all of whom have undergone an extensive application and testing process and earned the association’s stamp as a certified fraud examiner. Based on years of research, the group estimates that U.S. companies annually lose 6 percent of revenues, or $600 billion, to fraud.

Fraud examiners are typically hired by an audit committee or insurance company to look into financial statement discrepancies. They comb through documents and interview key people, then prepare a report of their findings. Although fraud examiners draw no legal conclusions, they identify a suspect and possible co-conspirators, sometimes fingering the CEO. The company then decides whether or not to take action.

As the association’s president and chief executive, Bishop, 41, tirelessly leads the charge to wipe out fraud. He regularly gives seminars to college professors as part of a push to establish courses on fraud prevention at every major university in the U.S. He also speaks before such groups as the FBI, the American Bar Association and the National White Collar Crime Center.

Oxford-educated and trained as an accountant, the English-born Bishop began as a litigation consultant in cases involving accounting fraud. “The more I worked in the area,” he relates, “the more I was fascinated by it and wanted to learn more.” Most amazing, he says, is the willingness of senior executives to commit large-scale fraud, somehow convincing themselves they won’t get caught.

“They may view it as a somewhat victimless crime-that they can smooth things over and no one will really know or care,” Bishop says. More often than not, he adds, “the problem does not get reversed in the next period, the business falls increasingly far short of expectations and the fraud grows rapidly, quarter by quarter, until it becomes so big it’s like an elephant in the corner of the room.”

Bishop predicts more accounting scandals to come, including at companies whose CEOs recently signed statements on the accuracy of their financial disclosures. He says some chief executives may have taken calculated risks that their manipulations would go undetected.

To make a real impact, Bishop argues, companies must put a series of fraud-prevention practices into place. He recommends that companies assess their risk of internal fraud on a regular basis, assign a senior-level person to manage the risk and charge their board or audit committee with overseeing it.

“It’s a matter of looking for skeletons in the most likely places,” he says, “and that’s the sort of testing that shareholders believe is happening right now and want to be happening right now, but in most cases it isn’t.”


Muckraking Journalists

Around the turn of the 20th century, as America was shifting from an agrarian society to an urban, industrialized nation, a breed of journalists began chronicling newfound corporate and social ills. In picture and word, Jacob Riis documented the squalor of tenement life. Upton Sinclair exposed alarmingly unsanitary conditions in meat-packing plants. Ida Tarbell attacked the monopolistic practices of Standard Oil. Muckrakers, these and other writers came to be derisively called.

While investigative journalism has hit highs and lows over the past hundred years, lately the muckraking spirit has risen anew. Books like Eric Schlosser’s best-selling Fast Food Nation and Barbara Ehrenreich’s Nickel and Dimed have importantly shed light on labor and public health abuses in some of the nation’s largest industries. A more personal, but no less critical outlook emerges in Selling Ben Cheever: Back to Square One in a Service Economy.

After getting laid off as a high-ranking editor at Reader’s Digest, Benjamin Cheever spent five years pursuing one menial job after another: security guard, computer salesman, sandwich maker, bookstore clerk. What Cheever, now 54, discovered was a treadmill of dead-end jobs where workers are exploited and opportunities for advancement prove a hollow promise.

“These people, unless lightning strikes, they’re going to be working for eight dollars an hour their whole lives,” says Cheever. “They’re always going to be hoping for more. They’re never going to get a shot at it. It’s a democracy-the doors are supposed to open to people-and these jobs just don’t open the door.”

Cheever considers journalists an essential watchdog, but worries about their effectiveness. Given the daily pressure reporters face, they often opt for easier rather than harder stories. And it’s easier to pursue public officials than well-guarded corporate chiefs.

“There’s nobody to turn in CEOs,” laments Cheever. “They don’t have a natural enemy within their corporation. They have power over everybody. It’s a very limited oligarchy.”

Cheever sees certain similarities between the corporate abuses of today and those that spurred the trust-busting of Theodore Roosevelt a century ago. But in some ways, he suggests, today’s CEOs bear little comparison to Gilded Age industrialists like John D. Rockefeller and Andrew Carnegie.

“Those guys were owners; they weren’t CEOs,” notes Cheever. “And as owners they turned out to be hugely responsible citizens.” Both in their lifetimes and through their heirs, Carnegie and Rockefeller gave away enormous amounts of their wealth. With a few exceptions, today’s CEOs “aren’t in the same position-they aren’t as colossally wealthy,” says Cheever. “But also I haven’t seen them feeling very responsible.”


Class-Action Lawyers

It’s one of the truisms of a capitalist system: During periods of extreme conditions, economic or otherwise, one person’s misery is another’s market. Sales of low-risk government bonds soar as confidence in the stock market plummets. Air-conditioner salespeople thrive when there’s a heat wave. As evidenced over the past year, class-action lawyers see their caseloads balloon during eras of corporate fraud.

“We’ve got our hands full at this time,” says Fred Isquith, the lead securities litigator at the New York law firm of Wolf Haldenstein Adler Freeman & Herz.

Seldom does a week go by that Isquith doesn’t announce that he’s filed yet another class-action against a major corporation and its CEO, alleging securities fraud. The list of defendants includes Enron, Walt Disney and Halliburton, the Texas oil company that Vice President Dick Cheney used to run.

When Merrill Lynch agreed in May to pay $100 million to New York and other states over allegations that its stock analysts misled investors, Isquith was quick to say the settlement would bolster a suit he’d filed against Merrill. Although Merrill admitted no wrongdoing, he said, the investigation by New York Attorney General Eliot Spitzer would help dispel notions of “investors as sore losers and lawyers as scrambling after dollars.”

To be sure, class-action law can be a highly lucrative business. Two years ago, Isquith’s firm won a $100 million-plus settlement with MicroStrategy, a database software maker in McLean, Va., after its stock tumbled from $313 to $17 in just two months. Roughly a fifth of the settlement went to the firm.

But as the 54-year-old Isquith sees it, class-action battles are about more than money; they’re about righting corporate wrongs: “Government and law regulate our otherwise nasty behavior to each other.”

Isquith attributes his brisk business to Congressional reforms in the mid-to-late-1990s that weakened federal oversight of Wall Street. A number of CEOs personally took advantage, he says, acting out of greed and in the process losing billions of dollars of shareholders’ savings.



By almost any account, a year after the September 11 attacks, terrorists continue to pose one of the gravest threats to CEOs, to say nothing of their potential danger to the world as a whole. No one can predict when, where or how the next major terrorist strike will occur, in America or abroad, and which industries will be impacted the most.

But what is clear, given the plight of the U.S. airlines, is that a single set of terrorist strikes can decimate an entire industry. The nation’s airlines, the industry hardest hit, have lost $10 billion, laid off more than 100,000 workers and ousted several of their CEOs since September 11. Business-class travel, a key revenue source, continues to lag far behind its earlier levels. Meanwhile, massive efforts to tighten airport safety have largely failed on two fronts: Security breaches remain, as news accounts of reporters managing to smuggle weapons onto planes make clear; and baggage checks are so copious that many Americans eschew air travel, especially short-haul flights.

Cyber terrorists, meanwhile, represent an entirely different threat. Experts say that computer hackers, working anywhere around the world, may have the ability to carry out such catastrophic acts as shutting down an electrical power grid or silencing America’s telecommunications network for several hours. A recently seized Al Qaeda computer was found to contain software that simulated the destruction of a dam.

In certain ways, corporations have reacted quickly in preparing for future attacks. When the consulting firm KPMG recently surveyed 135 large U.S. companies, two-thirds had their “chief risk officer”-a position almost unheard of a year ago-answer the questionnaire.

But the same research also indicated that many companies remain ill-prepared to deal with a crisis. Nearly half of them reported having no preparedness plan in place, while an overwhelming majority said their organizations remained vulnerable to a serious breach in operations should another terrorist attack occur.


The Public

As a fire investigator for the city of Vista, Calif., George Lucia reviews construction plans, does annual inspections and sifts through the charred, sodden remains of burned-down homes and warehouses to determine the cause of the blaze.

Like so many other workaday types, Lucia might seem as if he’d have little concern for the boardroom deals brokered over polished conference tables. But as news of one accounting scandal after another arrives with the morning paper, his interest becomes more and more piqued.

Lucia, 49, who grew up in suburban New Jersey, can’t help but think back to when companies, by and large, were community fixtures. They offered stable jobs and boosted the tax base, sponsored Little League teams and pitched in for new firetrucks.

“We kind of look at that as old-fashioned,” Lucia says. “That’s the picket fence and the apple pie, so to speak. Now, with all the mergers and regionalization and consolidation and takeovers, we don’t even know who the people are or what the connection is anymore.”

The recent flurry of scandals, he says, has eroded what little trust Americans still had in major corporations. For example, the California firefighters’ pension fund had invested in Enron. Although the fund had a diverse portfolio, some firefighters wonder whether they’ll ever recoup the losses from Enron’s collapse, Lucia relates.

He says the idea of putting hard-earned money into the stock market no longer carries much appeal. Instead, Lucia says, most people he knows would rather invest in a small business or back a friend on a project. “You want it to be local,” he says, “and something you can touch and see and trust.”

If Lucia could send a message to CEOs, it would be that integrity, not share price, is important above all.

“Whether it’s the president of the United States or it’s the police chief or fire chief or whether it’s the president of a large corporation, I think that goes with the territory,” Lucia asserts. “These people who have succumbed to the temptations of cooking the books and just become greedy at the expense of the people who trusted them-there’s no excuse for that.”


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