Comment: boards must face rising ire of investor class. (Boards Under Fire--What do They Know?).

The following editorial appears in the May 6, 2002 issue of Business Week magazine.

A new era of reform is dawning for Corporate America. Sparked by a popular revolt of the investor class and driven by a Republican Administration surprisingly intent on change, this movement aims to restore core American values of fairness, equity and responsibility to the practice of big business in the U.S. Because the reform impulse is coming from the center and the right, generally sympathetic to business, the demand for change is all the more potent. It cannot be ignored.

The magnitude of this movement has been underestimated by many chief executives. They fail to see that the accumulation of indictments, investigations, financial restatements, conflicts of interest, and examples of executive greed has led to a major breach of trust between the public and business leaders. Those CEOs who dismiss the push for reform as merely a temporary down-market phenomenon or overreaction to Enron Corp. risk hurting themselves, their corporations and the nation. If confidence in Corporate America's leadership is not quickly restored, the equity culture that generated so much wealth in the '90s will dissipate.

The last time the impulse to reform Big Business came from the center-right was at the turn of the 20th century, under Theodore Roosevelt. Then, Roosevelt railed against the institution of the giant monopoly trust and the risk it posed to American democratic values. Today, President Bush is criticizing not the corporation per se, but the values held by the business elite. It is the failure of far too many CEOs, board members, accountants, analysts and lawyers to take personal responsibility that makes the reform effort so much a conservative movement about values.

So too is its source. The populist groundswell against Big Business is not made up of unions or the working poor on the left, but the prosperous, educated, suburban middle class that lives in the political center. The 100 million-strong investor class embraced the equity culture of the '90s, with its vision of a high-risk, high-growth economy of deregulated markets, individual choice, and opportunity -- only to be deceived by insiders who hid the truth, rigged the odds, and enriched themselves.

Investor anger

How did this happen? During the bubble years between 1997 and 2000, it appears that some proportion of the business elite moved into a different moral landscape from the rest of the country. Some CEOs with compliant boards began to pay themselves sums so outrageous that they broke the rules of fairness and equity. At a time when teamwork was raising productivity, some CEOs embraced a winner-take-all philosophy. Twenty years ago, CEOs made 40 times the average employee. Today it is 600. And the bubble has yet to come out of CEO pay. It is still rising.

Some CEOs have even ignored the fundamental American value of rewarding performance and punishing failure. Stock options that fell out of the money were repriced or swapped. Generous severance packages were negotiated going into the job -- or out. Overcompensated for success, some CEOs decided they should not be penalized for failure. They lived beyond the norms of the nation.

An army of professionals enabled them. Conflicts of interest became a way of life among professionals who once took great pride in the honesty and integrity of their work. Accountants who were trusted to watch the books cooked them instead. Boards of directors who should have been auditing financial statements spent far more time on compensation matters.

The nation is demanding that the business elite reconnect with America and restore the values that most people hold dear. What should be done? The investor class revolt is already bringing honesty back to the financial landscape. Those companies that provide them are being rewarded on Wall Street. Those that don't are getting hammered. With remarkable speed, debts hidden off the balance sheet in partnerships are being brought into sunlight, one-time events passed off as recurring items are being challenged and the quality of earnings is rising fast.

Shaming CEOs

In the political and regulatory arenas, progress is slower. Restoring fairness to executive pay is critical. One obvious step is for corporate boards to "just say no" to outlandish requests for millions of options, personal loans and giant severance and retirement packages. Another would be to reshape stock options so that they are indexed against peer companies and measure true executive performance.

Some companies should try separating the role of CEO and chairman of the board to improve governance. The New York Stock Exchange and Nasdaq should insist that key board committees have independent directors. Independent governors for the Financial Accounting Standards Board would speed up auditing reforms.

Legislation may be required, but in the end shame may be the most effective method of restoring Corporate America's reputation. The President himself, a Harvard MBA and former CEO, and Treasury Secretary Paul H. O'Neill, another former CEO, have both used the bully pulpit to pressure executives to be more personally responsible for their companies' performance. They have encouraged tough action by the Securities and Exchange Commission and the Justice Department to make public examples of egregious behavior.

The essence of leadership is to keep followers out of harm's way and to share in the risks and rewards of group enterprise. Somewhere, somehow, many CEOs forgot this eternal truth. It's time to relearn it.