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CEOs Far From the Flame Still Feel the Heat

CEOs Far From the Flame Still Feel the Heat By SHELLY GARCIA Senior Reporter “I’m the CEO, but these days that’s not a title we really like to use,” said a chief executive recently. He was joking, sort of. Even the most scrupulous of CEOs is apt to blanch, what with the scandals that have thrust corporate America under the public microscope. It isn’t just the sight of those once lionized being hauled off in handcuffs, the notion of thousands left jobless as a result of mismanagement or the money thrown away so that a privileged few could live large right down to their laundry. The debacles of Enron, Tyco and Worldcom, revelations about former General Electric chief John Welch, Sunbeam’s Albert Dunlap and others have sent the weight of responsibility that comes with corporate governance crashing down on the shoulders of all chief executives and officers. “You can see the damage when business leaders don’t act responsibly, and you can see the effect on our society in general,” said Jay M. Gellert, president and CEO of Health Net Inc. “It really reinforces the fact that we affect the public mood and way of life, and we have a responsibility that’s broader than the company we’re in. This whole process has brought that home.” Most CEOs have nothing in common with Enron’s Kenneth Lay or John Rigas who ran up $66 million in petty cash advances from Adelphia before it went belly up. But they are looking over their shoulders anyway. Some are even going back to school to bone up on arcane accounting concepts. In the current environment, you can’t be too thorough, or too careful. “Every CEO should have something to fear because there’s going to be much more due diligence on everything they do, from the way they keep their books to the way they keep their marriages,” said Warren Bennis, distinguished professor of business at USC. “So I think the world will look at those who have been deified. Even those honest as a hound’s tooth have to be more aware of the public’s scrutiny.” Although some of the scandals have touched the San Fernando Valley business community in Westlake Village, Homestore Inc. chairman Stuart Wolff was pushed out after the company was forced to restate its revenues, and three former officers of NewCom Inc., a now defunct Westlake Village company, were just indicted for cooking the books most Valley companies are either too small or too grounded in nuts and bolts businesses to even provide the kinds of opportunities for abuse others have exploited. But local CEOs are paying the price of the corporate scandals elsewhere just the same. They are working to adopt new financial reporting guidelines required by legislation or stock exchange regulations. They are paying higher premiums for liability insurance to cover officers and corporate executives in the event of a shareholder lawsuit. And they are worrying over the erosion of public trust and how to restore it. “It’s impossible for a director to read all this stuff in the papers and not feel a little nauseated,” said Gary Wehrle, chairman and CEO of Pacific Crest Capital Inc. “And to be a little nervous about what if it becomes a feeding frenzy.” Wehrle said he’s spent considerable time lately reviewing accounting reform legislation and New York Stock Exchange regulations adopted in recent months. The bank’s operating structure actually exceeded some of the new requirements, but some of the framework needed tweaking. For example, under the bank’s old setup the board of directors had four committees, with nominations handled by the nominations committee. The N.Y. Stock Exchange only requires three committees, but it stipulates that nominations be handled by a corporate governance committee, which the bank did not have. Pacific Crest restructured its nominations committee to reflect those requirements. Other stock exchange guidelines call for a sophisticated financial executive to chair the audit committee, but within a bank’s structure, every board member has a great deal of financial savvy. “We interpreted it as someone who has been a CFO or a CPA,” said Wehrle, “so we changed around the committee chairman so somebody who is a CPA will be chairman.” The new scrutiny and requirements, including accounting reform legislation passed earlier this summer, sent a sellout crowd of top corporate officers and directors flocking to the University of Chicago last month for a cram course. The Directors Consortium, developed by the Wharton School at the University of Pennsylvania, Stanford Law School and the University of Chicago’s School of Business, combined for the first time individual continuing education programs offered at each of the schools, in a longer format designed to address some of the issues that have arisen as a result of the scandals. “We would have been happy with 45 (executives attending),” said Mike Malefakis, senior associate director of executive education at the University of Chicago. “We had about 80 and we had to start putting people on a wait list a month before.” The schools now plan to offer the course, which drew top executives from Fortune 500 companies, twice a year, rotating the location among the three institutions. The pressure from corporate America’s fall from grace has even penetrated the smallest private companies. Consider tiny Internet Machines, which is still in the R & D; phase of its development. “There’s a lot more money going out than coming in,” said Chris Hoogenboom, president and CEO of the Agoura Hills company. “So there isn’t really an opportunity for us to get into trouble.” But when it comes to liability insurance for its officers and executives, even Internet Machines is being cast in the same light as its far larger brethren. “When it came time to renew our directors insurance, our rates went up by a factor of six,” Hoogenboom said. “In an era of Martha Stewart and Enron, companies are all being lumped together and forced to pay a much higher insurance premium.” Then too, the so-called Sarbanes-Oxley bill, which would hold directors personally liable for fraudulent misrepresentations, could even go so far as to affect the makeup of corporate boards. “I betcha it’s going to be a little harder to find outside directors,” said Wehrle. “They’re not paid very much. If you were a person of considerable net worth, would you want to take a chance of risking it to make $25,000 a year?” Though few are willing to admit to it publicly, some say board members had become a clubby group adding more style than substance to the companies they served. Some charge that board members were only too happy to approve sky-high pay packages so that they could use the new levels to their own advantage when it came time to negotiate compensation back at their own companies. Those who choose to remain on boards, and those who join them in the future, may approach the task differently. “The people on the boards are under pressure to take a closer look at what people are doing,” said Ricardo Bayon, a fellow at think tank New America Foundation who specializes in corporate responsibility. “Outrageous pay packages are going to be looked at twice or three times, which is twice or three times more than before. And that will be a change.” CEOs too will likely have to draw on different skills, delving more deeply into the nuts and bolts of their operations, accepting input from different entities and generally learning to live in a fish bowl. Most, however, say it’s a small price to pay to restore public confidence. “At the end of the day, you have to answer for what you do,” said Gellert. “It’s still a great honor to lead a company and the biggest mistake we can make is to be defensive or to get into ‘woe is me.'”

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