Old Cloud Darkens Wall Street

NEW YORK —  Allegations of illegal and tawdry behavior by executives have become an almost weekly spectacle, shaking investors’ trust in the nation’s business leadership and prompting criticism that a new era of greed has tainted corporate America.

The arrest Wednesday of ImClone Systems Inc. co-founder Samuel D. Waksal on insider-trading charges is the latest in a spate of scandals involving high-profile executives. It comes a week after the indictment of former Tyco International Ltd. Chief Executive L. Dennis Kozlowski on charges of tax evasion, which in turn followed revelations of questionable behavior by top brass at Adelphia Communications Corp., WorldCom Inc. and, of course, Enron Corp.

Boards of directors have begun to take action, sweeping out executives at these companies and others. But critics say it has been too little, too late to dispel the cloud of mistrust darkening America’s executive suites.

Investor discontent can be seen in the slumping stock market and in the remarkable success during this season of annual meetings of a number of shareholder initiatives taking direct aim at lavish CEO pay packages and attempting to boost director independence.

Legislators, regulators and prosecutors at the federal and state levels have ramped up investigative activity to a pitch not seen since the savings-and-loan and Wall Street scandals of the 1980s. Some say the current disenchantment even surpasses that of the Decade of Greed as symbolized by Gordon Gekko, the villain of the 1987 movie “Wall Street,” who was modeled in part on inside trader Ivan Boesky.

“In my lifetime, American business has never been under such scrutiny,” Henry M. Paulson Jr., chairman of the investment bank Goldman Sachs, told an audience at the National Press Club in Washington last week. “To be blunt, much of it is deserved.”

Business scandals always have been an unwelcome byproduct of an economic system that rewards the pursuit of self-interest, said Daryl Koehn, director of the Center for Business Ethics at the University of St. Thomas in Houston.

What’s new and disturbing, she said, is that corporations and boards of directors are “showing a tendency to cater to the personal greed of their executives and are turning a blind eye to conflicts of interest.”

Enron directors, for example, explicitly voted to suspend the company’s conflict-of-interest policy so that Chief Financial Officer Andrew S. Fastow could run outside partnerships that enriched him personally, Koehn noted.

At Adelphia, WorldCom and Tyco, top executives received huge personal loans from the companies in addition to their hefty salaries and stock options.

All three companies are reeling financially and embroiled in scandal. All three also recently ousted their top managers--John Rigas and his three sons at cable TV operator Adelphia, Bernard Ebbers at phone giant WorldCom and Kozlowski at Tyco, the manufacturing conglomerate.

In the case of ImClone, authorities charge that Waksal got early word of a devastating Food and Drug Administration ruling against the biotech firm’s top drug prospect. Waksal allegedly tipped off family members so they could dump millions of dollars in ImClone stock before the news reached the public.

Waksal, reportedly under pressure from ImClone’s board, stepped down as chief executive three weeks ago and was replaced by his brother and company co-founder Harlan W. Waksal--who is himself the subject of questions regarding his trading of ImClone stock.

Samuel Waksal’s lawyer said the charges were based on “entirely circumstantial” evidence, and Harlan Waksal’s attorney described the timing of his client’s stock sales as “coincidental.”

Do the abrupt departures of Samuel Waksal and the others mean corporate directors are finally getting tough with management? Not necessarily, experts said.

“The fact you’re seeing more exits than before is a good thing, but it’s too bad these boards didn’t act decisively before so much damage was done,” said Charles Elson, director of the Center for Corporate Governance at the University of Delaware.

Pressuring Kozlowski to resign a day before his indictment was not exactly a stern test for Tyco directors, said Jamie Heard, chief executive of Institutional Shareholder Services in Rockville, Md., which advises pension funds and other institutional investors on issues of corporate governance.

Kozlowski’s resignation voided his multimillion-dollar severance package, but Tyco said it had entered into “good-faith negotiations” with him on a new deal. Those negotiations will be a better test for the board, Heard said.

“If they vote him even a penny of severance, it will be a penny too much,” he said.

Whether or not they are reacting quickly, directors are feeling the heat from shareholders. Of 174 nonbinding corporate governance resolutions submitted by shareholders this year, 40% passed, shattering the previous record of 25%, according to the Investor Responsibility Research Center, a Washington-based proxy advisory service.

Many of the proposals addressed executive pay and fringe benefits. That level of success is striking because such resolutions are nearly always opposed by company management and directors.

Domini Social Investments, a mutual fund company that uses its financial clout to promote corporate responsibility, reported this week that its own shareholder initiatives also had achieved unusually strong support this year.

“A post-Enron crisis of confidence appears to have fueled shareholder discontent,” said Adam Kanzer, Domini’s director of shareholder advocacy.

Former Enron Chairman Kenneth L. Lay was revealed this year to have sold more than $70 million in stock back to the company in 2001, much of it while assuring worried employees that the company was solid and the stock a good buy.

Lay’s spokeswoman, Kelly Kimberly, has said the sales were forced upon him by margin calls, or demands for collateral from broker-lenders.

Kozlowski also quietly cashed in tens of millions of dollars in Tyco options while publicly maintaining that he seldom sold company shares.

For investors whose Tyco shares have slid 75% this year, the details of the Kozlowski indictment must have been galling. The now-former CEO allegedly had empty crates shipped to New Hampshire to avoid paying about $1 million in New York state and city sales taxes on $13.2 million in fine art purchased for his Fifth Avenue penthouse. Kozlowski has pleaded not guilty to all the charges against him.

“This idea that paying taxes is for suckers is part of a contempt for government that goes hand in hand with the mania for deregulation,” said Marjorie Kelly, editor and publisher of Business Ethics magazine in Minneapolis.

Kozlowski had moved Tyco’s official base to Bermuda five years ago to avoid U.S. corporate income taxes.

A Bermuda neighbor of Tyco’s is Global Crossing Ltd., the once-highflying telecommunications company that filed for bankruptcy protection in January.

Founder Gary Winnick, who ran Global Crossing out of a Beverly Hills replica of the White House Oval Office, cashed in stock worth more than $600 million while the company was still on the rise. The bankruptcy filing cost his employees and other investors hundreds of millions as the company’s stock price plunged.

A spokesman for Winnick did not return calls for comment Thursday.

Kelly said a “winner-take-all mentality” formed during the downsizing wave of the early 1990s has led to excesses in personal and corporate behavior.

Business leaders themselves seem to believe that their problems may be more image than reality, a new survey for Chief Executive magazine indicates.

True, “unethical corporate behavior” was cited as the second-greatest threat to America’s corporate reputation, according to the survey by Harris Interactive released last week. But the top threat, cited by 49% of the 600 corporate CEOs and presidents participating, was “media criticism.”

However, Goldman Sachs’ Paulson, in his National Press Club speech, asserted that the business community’s black eye has been largely self-inflicted.

Looking for ways out of the ethical morass, Paulson called on corporate America to bolster the independence of boards of directors and to require executives to forfeit any gains on stock sales that come within a year before a bankruptcy filing.

Some of his suggestions echoed proposals made last week by the New York Stock Exchange.

The Big Board proposed strengthening the independence of directors and disclosing more information about stock options and personal loans to company directors and officers.

“The New York Stock Exchange doesn’t normally pay much attention to corporate governance issues,” said Heard of Institutional Shareholder Services. “So when they do something, it only shows how worried people are. All these ethics issues have had a terribly corrosive effect on public trust, and that has been very bad for the markets.”