Yale '62 - Beware the Swinging Pendulum - Neal Freeman

By Neal Freeman

My advice both to fellow investors and boardroom colleagues is this: beware the swinging pendulum. The new Sarbanes-Oxley Act of 2002 (Sen. Paul Sarbanes, D-MD and Rep. Michael Oxley, R-OH)), intended to protect investors by strengthening corporate governance is in fact ill conceived, ill-considered, ill-drafted and (one confidently predicts) will be ill-applied. But it's the law of the land. So deal with it.

The most recent board meeting I attended gave only cursory attention to operations. It was organized around briefings from inside-outside lawyers and insurance experts. The central message: the liability to which directors are now exposed is comprehensive, the coverage from even the premiere providers of D&O (Directors & Officers) insurance clearly less so.

Yale '62 Poll
Beware the Swinging Pendulum Poll
The American business and investor scandals of 2001-2002 are: (Select one)
What should be expected as part of a dynamic and cyclical economy
A sign of serious decline for the United States
An indication of too much focus on money and stock price

Add in the increased public and media scrutiny, the open-season license issued to tort lawyers to troll through corporate files (and convenient memories), the expanding workload and downhold pressure on compensation and you have at least three early results;

  1. Sarbanes-Oxley is quickly becoming the Lawyer's Full Employment Act;
  2. Competent board candidates are making themselves scarce;
  3. With the impressive synchronicity of the Law of Unintended Consequences, boards are showing early symptoms of the Japanese disease -- risk-aversion, blame-spreading and fanny-covering.

We've seen this movie before, of course. After the malefactions of the Watergate crowd -- which, in like fashion, were seen as systemic failures by some, individual aberrations by others -- the reformers decided to clean up the political process once and for all. What the reformers devised and then bequeathed to us is what is generally known today as the campaign finance mess. Twenty-eight years later and we're still digging our way out of the hole dug by Watergate reformers. Beware the swinging pendulum.

Editor-in-Chief Al Chambers asks whether "the worst is behind us" or there's "more scandal and uncertainty to come." It's difficult to imagine more excess than Ebbers at Worldcom, more rapacity than Kozlowski at Tyco, more self-aggrandizement than Rigas at Adelphia, more client greasing than the accountants at Arthur Anderson, more professional flexibility than the lawyers at Vinson & Elkins. But more scandal and uncertainty to come? I would think that the chances are roughly one hundred percent. The Whistleblower-Tort lawyer-Media Industrial Complex is in full-forward mode. And it's probably not all bad.

The roots of the capitalist system should be watered every generation or so with the blood of capitalists. My only hope at this point is that the accounting of GE stands up. If GE and the Jack Welch Way go down, they may take all the scaffolding with them. And that's all bad.