Saturday, June 18, 2005

Over-regulated Corporations? We probably need it.

Dennis Kozlowksi, shamed CEO of Tyco, faces 25 years in prison. He and a partner were convicted of embezzling or bamboozling Tyco's shareholders out of half a billion dollars. Recently, Hank Greenburg of insurance giant AIG left his post, under threat of indictment from New York Attorney General Elliot Spitzer for engaging in accounting practices that most people I've spoken with will call "agressive" but don't actually know whether or not they're illegal.

I had an unfortunately off the record lunch with an executive who I can't name here or anywhere who, while complaining about the costs of the Sarbanes-Oxley legislation that makes corporate executives and directors personally responsible for the verity of financial statements made by the company. He said something interesting -- he signs off on documents, claiming personal knowledge of things that he can't be reasonably expected to know everything about. He's basically betting that the vce presidents he hires and the regional managers they hire are honest people. He has a point. We don't expect the CEO to be looking over the shoulders of every employee on a day to day basis, and we probably don't want them to.

However, on the issue of Sarbanes-Oxley, the various prosecutions and the increased scrutiny on business in general, he said, "We probably need it."

Still, there have been excesses. I really like and admire Elliot Spitzer, who I hope will be New York's next governor. But, I think he went overboard prosecuting Richard Grasso, ex-head of the New York Stock Exchange. At issue was Grasso's lavish $150 million pay package. But the people who gave him all that money, the exchange's board, are some of the smartest and most ruthless investment bankers in the country. They weren't swindled, they offered him the money and he took it. I can't imagine turning down a $150 million job offer at any point in my life, assuming I think the people making the offer have the money and will make good. Only difference between me and Grasso is that I'd work about half the year, take $75 million, and you'd never see me again as I would then proceed to blow $75 million making a movie like Clerks with a very large special effects sequence in the last 10 minutes.

Grasso's executive assistant even came under fire for her $200,000 salary. When I read those stories, I called a guy I know who works with Grasso and asked about it. To me, $200,000 seemed a paltry salary for a woman who worked for a guy making $150 million (and who you have to expect to be a demanding boss). Well, it turns out that his executive assistant was worth far more than $200,000 a year. She worked 70 hour weeks. She had a freaking law degree and bar membership. Given that attorney partners at white shoe law firms often make half a million a year, she had actually made a sacrifice to work for Grasso. Life's complicated, even for the rich.

Grasso is fighting Spitzer in court. Most folks don't, they just settle and get on with their lives. So, we'll see.

Martha Stewart was another wrong-headed prosecution, I thought. She really went to jail for being a bitch. She was never convicted of insider trading and one could argue that she wasn't an insider of IMClone anyway, she was just a stockholder who knew the CEO. But hey got her on obstruction of justice. She stupidly lied to investgators when she should have said... nothing.

I see a lot of fraud in my job. I've written about it, I've exposed it, I've staid up at night worrying about the connections I've drawn (but have twice been vindicated by indictments against the people I've written about) and I've come to this conclusion: big money doesn't necessarily mean corruption. I've followed many false leads over 6 years. I've seen things that look bad but that aren't. I've seen things that look good and have later learned weren't. I've met people like Vanguard Founder John Bogle, and hedge fund manager Mohnish Pabrai, who are rich because he they are honest and I've met their opposites.

In the wake of the Tyco convictions, you'll see a lot of commentary that says we've gone too far, that we're regulating risk-taking out of corporate America and that the willingness to take on risk is fundamental to the creation of wealth. I think, to be fair, there have been missteps. I think Spitzer has made a few of them. But, don't forget my annonymous CEO: "We probably need it." He wasn't being politically correct. He's also a staunch conservative and he hates regulations of all kinds and, this regulation hits him directly, it complicates his life, it adds hours to his day. But, he says "We probably need it." I'm going to go ahead and defer to him on this one.


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