By Michael S. Olympios
Chief Consultant
Allied Business Consultants
Enron was not just another scandal in the history of US financial markets. It was a catastrophe of epic proportions. It caused thousands of people to lose their jobs and even more to lose their savings. But Enron served another, perhaps even greater purpose. It was a wake up call for everyone, including analysts, investors, lawmakers and regulators. What really puzzled analysts and regulators however was the fact that Enron’s board met even the most rigorous independence criteria and represented a wealth of financial acumen; its audit committee head was an accounting professor and a former dean at Stanford’s business school. In the aftermath of public scrutiny it turned out that certain relationships have compromised board independence which ultimately gave rise to abuses. The SEC, the US top watchdog of financial markets gained new powers with the Sarbanes-Oxley Act of 2002 but even before that came to effect it assumed a leading role in defending the public interest. When everything else failed the SEC sought action against those who forfeited public trust and abused it. The fight of SEC to restore public confidence is often seen in efforts to restore investors’ losses.
Last Tuesday the SEC settled one of the most difficult battles in its recent history by reaching an out of court settlement of $81 million with HealthSouth’s founder and former chief Richard M. Scrushy. Under terms of the agreement, filed in U.S. District Court in Birmingham, Ala., Mr. Scrushy agreed to give up $77.5 million in gains and pay a $3.5 million penalty. Mr. Scrushy neither admitted nor denied the SEC’s allegations, and will receive credit for $71.5 million he has already paid or forfeited in related cases — cutting the remaining bill to $9.5 million. According to the Wall Street Journal, Jack Worland, the SEC trial lawyer on the case, said prosecutors agreed to settle out of court because “it fulfils everything the commission could hope to get.”
Though the settlement falls short of a conviction for Mr. Scrushy, “it achieves the commission’s objective of defending the public’s interest.” Few regulators around the world assume the role of defending the public interest in such a way. Mr. Scrushy was charged by the Justice Department and the SEC in 2003 with accounting fraud and insider trading. At the time, the SEC sought more than $200 million in penalties, and Mr. Scrushy faced the possibility of years in prison. However, the SEC civil charges were put on hold during his five-month criminal trial in 2005. They were reinstated after a jury acquitted Mr. Scrushy of all 36 criminal counts. According to WSJ the amount was one of the largest recovered by the SEC and that alone is a victory. The crackdown on corporate wrong doing is increasingly taking new dimensions, bringing the actual battle in the boardroom. As the stakes get higher, so as the standards. Though corporate governance reforms are often driven by regulators in reality it is the boardroom that still serves as the first line of defence of the public interest. It is absolutely crucial that the nomination committee is choosing the right directors — with the right skills, expertise, and personalities. Sometimes companies in their efforts to satisfy regulators simply change the insider–outsider mix on the board.
But board balance alone is an insufficient guarantor of effectiveness. Boards need to possess, collectively, the diverse array of skills and knowledge needed to perform effectively in their advisory and oversight capacities. The central test for a director should be: Does he or she add value? And can he or she is independent and competent enough to defend the public interest?
