[PEN-L:30013] back to school

["Ian Murray" <seamus2001@xxxxxxxxx>]

[what would an URPE school look like?]

[NYTimes]
September 3, 2002
Back to School, but This One Is for Top Corporate Officials
By ANDREW ROSS SORKIN


CHICAGO - The class was not faring well. On its accounting exam the average
score was 32 percent. The teacher was particularly exasperated that so many
students had missed a multiple-choice question on the meaning of retained
earnings.

"Don't tell me that you're on the audit committee and can't tell me what
retained earnings are," Roman L. Weil, an accounting professor at the University
of Chicago Graduate School of Business, said to the class.

These were no first-year M.B.A. students. They were top executives and board
members of some of the nation's largest corporations, at a novel post- Enron
boot camp.

About 80 officers and directors from companies including Pfizer, McDonald's,
Motorola and Dow Chemical sat through three days of lectures to understand how
to do their jobs at a time when far more people are watching them.

Many students came away daunted and frustrated by the overwhelming message in
almost every lecture: that the legal landscape is constantly shifting and the
liabilities for directors are greater than ever.

"We've got so many unknowns; there are no answers," James Boyd, chairman of Arch
Coal Inc., lamented on the last day of class. "And the risk has changed. They
are going to hold us to a much higher standard."

The program - the Directors' Consortium - was developed by the Wharton School at
the University of Pennsylvania, Stanford Law School and the University of
Chicago Graduate School of Business. It focuses on everything from whether notes
should be destroyed after board meetings (the answer: usually, but not always),
to who qualifies as a financial expert on a board's audit committee under the
strict new legislation approved by Congress. (The class members decided that
most of them would not qualify, but happily determined that Warren E. Buffett
would not either.)

"As I look around the room I'm not sure if this is an executive education
program or a support group," said Joseph A. Grundfest, a professor of law at
Stanford University who is a former commissioner of the Securities and Exchange
Commission and is on the board of the Oracle Corporation. "I feel your pain."

A class on directors' fiduciary duties and legal liabilities focused on the very
basic question of whether board members' main responsibility is to shareholders,
to all stakeholders or to the chief executive. "To whom do you owe the duty?"
asked Richard A. Epstein, a law professor at the University of Chicago. (The
class was divided on the answer.)

He told the class to always think about the answer this way: "Who can sue whom
for what?"

"The board is like an insurance policy," Mr. Epstein said. "When things are
good, you take your money and go to the beach. When there's a crisis, you're
working overtime and massively underpaid."

With executives now constantly in the firing line, in front of judges and
Congress, part of one class explored how to prepare for a deposition.

"You don't want to volunteer anything," Mr. Epstein said. "You have to have a
personality vasectomy." Mr. Grundfest added: "Think slowly. Don't pull a Bill
Clinton and ask what the definition of is is."

Henry J. McKinnell Jr., chairman and chief executive of Pfizer, told the class
at lunch that at a deposition recently he was asked whether the board minutes,
which were purposely kept vague, were accurate. "I had to tell them the truth,"
he said. "I said, `No. The minutes are not a complete reflection of what went on
there.' Our lawyer was going crazy."

At one point, the conversation turned to how to pick an outside lawyer. "The
real risk is that if you hire a criminal lawyer, you look guilty," Mr. Grundfest
said.

Most of the lectures were about why it is so important to avoid a lawsuit in the
first place. Of Arthur Andersen, Mr. Grundfest said: "As soon as it was indicted
it lost. They were de facto dead."

Board members were advised to create clear corporate governance policies and
always to make decisions collectively to avoid serious liability. "If you want
to get in real trouble, make a decision by yourself," Mr. Epstein said. "This
kind of misery loves company."

And the professors stressed over and over again to tell the truth.

"If there are ways people in this room go to jail, it's probably through crimes
of upholstery - the cover-up will kill you," Mr. Grundfest told the class. He
brought up the case in which Martha Stewart is being investigated for insider
trading. "She might go to jail because she lied even though she might not have
committed insider trading."

Given the greater liability now faced and the greater time commitment required
of board members, some students who are members of several boards - while also
serving as officials at their own companies - said they expected that they might
have to resign from one or two boards. Mr. McKinnell of Pfizer said board
members at his company put in about 200 hours of work a year.

David F. Larcker, a professor at Wharton, began his lecture on compensation
committees by acknowledging: "Once the public gets finished pointing fingers at
the audit committee, the compensation committee is next. This kind of stuff is a
public relations nightmare."

He discussed how boards should arrange compensation packages among salary, stock
options, restricted stock, benefits and perquisites and other items like
severance agreements. Despite dozens of seemingly outlandish compensation
arrangements for chief executives, which he displayed on a slide, Mr. Larcker
told the class that compensation in corporate America is "nowhere near how out
of whack as it is made out to be."

Still, he reminded the class that when interviewing job candidates: "If the
first question they ask is `How many country club memberships do I get,' that's
probably not the best candidate."

Steven N. Kaplan, a finance and management professor at the University of
Chicago School of Business and a board member of Morningstar, and Steven Koch, a
vice chairman at Credit Suisse First Boston who conceived the program, taught a
class on finance using Enron's balance sheet as a study of bad oversight.

"Look at this," Mr. Kaplan said, pointing to a line on Enron's cash flow
statement showing that "changes in components of working capital" shifted from
negative $1 billion to positive $1.7 billion in a year. "If you're a board
member, there has to be a disconnect."

Mr. Koch also warned the group of tricks bankers use to justify bad deals. "When
someone walks in the room and starts yakking about strategic value, you have to
ask, `What the heck does that mean?' " Mr. Koch said. "This is a frequent
repository for games."

For some students, the three-day program was more than enough. But others, like
Terry L. Savage, a board member of McDonald's and Pennzoil, wanted even more. At
the end of the accounting class, she raced up to Mr. Weil, the professor, and
asked whether she could take his accounting class on Monday evenings to brush
up. "After 11 years on the compensation committee and now going on the audit
committee, I decided to make it a major project to become informed about the
issues and the mathematics," she said.

Perhaps some other students should have shown her enthusiasm. While the average
score for the accounting test was 32 percent, that question on retained
earnings - undistributed earnings that have not been paid out to stockholders or
transferred to a surplus account - was answered correctly by fewer than 20
percent.