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As CEOs are handcuffed, ethics may not be

With so many high-ranking corporate officials heading for lockup this year, it may come as no surprise that 2006 is already a banner year for CEO turnover, according to a report by Challenger, Gray & Christmas, a New York-based outplacement firm. But a stricter regulatory environment has made a difference, experts say.
/ Source: Fast Company

Enron's former CEO is set to start a 24-year sentence in a federal prison in Minnesota. Jeffrey Skilling, who won a delay Monday while the court considers a bail request during his appeal, was sentenced in October after being found guilty on numerous counts of fraud and conspiracy for his role in one of the biggest corporate accounting scandals in U.S. history. It led to thousands of job cuts and billions of dollars in lost employee pensions at the now bankrupt energy company.

In September, WorldCom ex-CEO Bernard Ebbers checked into a medium-security prison in Oakdale, La., to begin serving a 25-year sentence for similar crimes that led to the collapse of the nation's second largest long-distance phone company.

Along with other former Enron and WorldCom executives, Skilling and Ebbers will soon be joined by Tom Rubin, the former chief of Focus Media, a Santa Monica, Calif.-based ad placement agency, who was sentenced last week to 5½ in prison for bilking Sears and Universal Studios out of $40 million.

With so many high-ranking corporate officials heading for lockup this year, it may come as no surprise that 2006 is already a banner year for CEO turnover, according to a report by Challenger, Gray & Christmas, a New York-based outplacement firm.

Through November, 1,347 CEOs resigned or were given the boot at businesses across the country, surpassing last year's year-end total of 1,322, the report says.

Behind those numbers is yet another corporate scandal that has already claimed 15 CEOs, and several more senior executives, in the past two months alone — employee stock option backdating.

Since the start of the year, more than 100 companies have undergone federal investigations into backdating, a way of boosting the value of options grants used as compensation by issuing them retroactively on days when company stocks were trading low, the Securities and Exchange Commission says. The worst offenders could be charged with securities fraud, and, if found guilty, face hefty fines and up to 15 years in jail.

All told, Challenger, Gray & Christmas has tracked 54 executive departures related to backdating, including 17 CEOs, 11 CFOs and eight general counsels.

“This could not have come at a worse time for CEOs, who are increasingly being scrutinized for their extraordinary compensation packages by shareholders and federal regulators,” John Challenger, the firm's CEO, says. “To have the highest-paid executives attempt to get even more money by backdating stock options is undoubtedly and understandably being viewed with considerable ire among rank-and-file employees.”

Linda Chatman Thomsen, the SEC's director of enforcement, puts it more bluntly.

“You have to ask yourself, what were they thinking? Falsified documents? Forgeries? Secret slush funds? Fictitious employees? Lying to the auditors? There's something very wrong here,” Thomsen said about options backdating in October at a Stanford University conference on corporate governance.

So far, the agency has taken action against two companies for options backdating — one of which prompted a dramatic flight from justice by Comverse CEO Kobi Alexander, who eventually appeared in Namibia and is currently fighting extradition to the U.S.

Thomsen says she expects only a fraction of the 100-plus cases the SEC is currently investigating to lead to convictions or jail time. “We are focusing on the worst conduct.”

Yet as these corporate bosses watch the disgraced CEOs of late 1990s accounting scandals being carted off to jail — from Skilling and Ebbers, to Tyco's Dennis Kozlowski and Mark Swartz, Computer Associates International's Sanjay Kumar, Adelphia's John and Timothy Rigas, Daewoo founder Kim Woo-choong, Dynegy's Jamie Olis, among others — has the stricter regulatory environment of recent years had any impact at all?

Thomsen believes it has. “I am gratified to see that we have learned something from Enron and all that followed, particularly the enactment of the Sarbanes-Oxley Act, insofar as it has highlighted the critical importance of corporate government,” she says.

Frank Vogl, president of Vogl Communications, the Washington-based publisher of, says American corporate ethics are actually far “better than their reputation.”

He cites a 2005 National Business Ethics survey showing a steady rise in employee-perceived corporate integrity standards today compared with 20 years ago, with U.S. companies pursuing more environmental programs, taking greater account of human rights, labor and discrimination issues in the workplace, and putting more resources into ethics codes and standards.

“However, many of these achievements are overshadowed by the headlines about corporate fraud, CEO crime, greed, and lying, as well as record fines for wrongdoing,” Vogl said in a keynote speech at the 2006 International Business Ethics Conference in Seattle last summer.

As he awaits jail, Skilling is currently under house arrest and fitted with an electronic-monitoring device. Under terms negotiated by lawyers representing former Enron employees, his personal savings of about $60 million will be liquidated and divided up within a restitution fund for victims of the company's collapse, on top of $15 million in legal fees.

Skilling will be able to take a year off his 24-year sentence by attending alcohol and mental-health counseling, plus up to 54 days for good behavior.