Enron, WorldCom investors get a little payback

Former WorldCom and Enron Corp. directors are at last feeling the pain of the employees and shareholders who lost livelihoods and fortunes on their watch.

In the last two weeks, 10 WorldCom directors have agreed to surrender $18 million of their own money to resolve investor claims. Ten Enron directors will cough up $13 million.

The deals are remarkable because few corporations do not fully insure their officers and directors against damage claims. The policies protect the corporation, and shelter individuals who might not otherwise expose themselves to the risks that go along with positions of responsibility. In the financial world, few responsibilities equal that of safeguarding billions of dollars invested by thousands of shareholders who believe in the company and its products.

If only every director thought of it that way.

Shareholders own the company. Directors are their proxies, or agents, overseeing management hired to run the business. Usually, there is some overlap between the board and management, with the chairman of the board frequently doubling as chief executive officer. Managers who sit on the corporate board are considered “inside” directors. Members with no other affiliation with the company are “outside” directors. All too often, inside directors manage the company as if it were theirs — and get away with it. Or did.

During the 1990s, directors often joined corporate boards only for the prestige. Some were serial board members. Fees were good, travel was paid, and there were lots of stock options to be had. Nominating someone for a seat on your board was a good way to reward them for a favor.

At WorldCom, for example, board members received a $35,000 annual fee, earned another $1,000 for every meeting they attended, and got 5,000 shares of stock. Enron paid fees of $50,000, but so sweetened the package with stock options and other extras the average compensation per director in 2000 exceeded $1 million. Of course, that was before the stock became worthless.

Rewards for favors? Wendy Gramm, wife of then-Sen. Phil Gramm, R-Texas, jumped to the Enron board from the Commodity Futures Trading Commission, where she had successfully worked to exempt energy trading from regulatory oversight. With that exemption in place, Enron ran wild, victimizing millions of utility ratepayers before its collapse in 2001.

Gramm is one of the 10 Enron directors now $13 million lighter. If that seems like just desserts, keep in mind the sum represents only 10 percent of proceeds from their sales of Enron stock. Theoretically, the IRS took a bigger cut.

If there is justice here, it’s in the fact their payments are part of a larger settlement that all but depletes Enron insurance covering directors and officers. Former Enron honchos Kenneth Lay and Richard Skilling are likely going to be on the hook personally for many millions in damages.

The financial pain inflicted on the WorldCom directors goes beyond the $18 million. According to the Wall Street Journal, they collectively lost $250 million on their company shares, although much of that may be paper only.

The recent settlements have some warning that corporations will find it more difficult to recruit responsible individuals to sit on their boards. If personal fortunes remain at risk even, as with Enron, a court dismissed claims of fraud, why bother?

Two Spokane natives say they are unconcerned.

Corporate securities attorney Patrick Schultheis says the settlements, groundbreaking as they may be, merely reinforce lessons disreputable corporations and their board members should have learned from earlier disclosures of malfeasance.

“Under these egregious circumstances, these guys should reach into their own pockets,” says Schultheis, who advises corporate boards from the Seattle office of Wilson Sonsini Goodrich & Rosati.

Individual board members have always been personally liable, he says. “It’s not like the rules have changed.”

Schultheis, son of Spokane County Superior Court Judge John Schultheis, says good board candidates thoroughly check out a company before agreeing to serve, and sustain that level of vigilance after shareholders vote them in. If they do not, he says, more engaged board members will push them out.

Spokane venture capitalist Tom Simpson sits on the boards of several private companies, which are less subject to scrutiny than those of public companies. Still, he says, they make the effort to comply with the same rules that apply to much bigger firms.

If you conduct business honestly, individuals with integrity will want to serve on your board, Simpson says.

Whitworth College Professor Doug Laher, though in accord with the Enron and WorldCom settlements, is more sympathetic to warnings that the legal and regulatory response to corporate wrongdoing will dangerously increase the costs of doing business in the United States.

The pool of competent, willing directors has shrunk as chief executives no longer believe they can properly fulfill the duties of sitting on other corporate boards. Companies that want to attract the best talent will have to offer higher fees, often to the distress of shareholders weary of compensation out of line with financial results.

Premiums for director and officer insurance, Laher notes, have skyrocketed.

Government and business continually readjust the relationship between public interest and private enterprise, he says. “That’s a delicate balance in the U.S.”

The backlash has already begun, with efforts to relax Sarbanes-Oxley financial disclosure rules and fend off allegedly over-assertive shareholder groups, notably state pension funds.

Some of that may be a good thing. But it’s also good that directors once insured against the consequences of their actions or inactions share the consequences with the shareholders they so badly let down. Among the Enron and WorldCom board members were law school deans, university presidents, corporate chairmen, even a member of the British House of Lords.

All should have known better.