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Boardroom Fraud Suit Could Be First Of Many

Sep 13, 2002 | AP

The lawsuit by Tyco International Ltd., seeking $730 million back from former top officers accused of theft, may be just the start of a nationwide corporate crackdown on lavish executive perks.

More lawsuits targeting executives are likely in cases of suspected fraud, while vaguely worded compensation contracts approving the benefits will be revised to deal with abuses, according to corporate governance experts and lawyers who specialize in fraud and executive compensation.

In the Tyco case, former chief executive Dennis Kozlowski is accused, among other things, of using $242 million from an employee loan program designed to help workers purchase Tyco stock to instead pay for yachts, fine art, jewelry, luxury apartments and vacations.

The lawsuit by Tyco seeking to recoup the money contends board members never knew about the alleged abuses. It "sends a strong message to executives that these actions are not without consequences," said Charles Elson, director of the Center for Corporate Governance at the University of Delaware.

While the alleged abuses by Kozlowski and two other former Tyco executives seem extreme, he said, many U.S. corporations gave their top executives loans for millions on favorable terms and continue to provide generous housing or relocation compensation.

A law went into effect in July banning the loans, but experts believe many corporate boards are trying to determine precisely how much they doled out before the ban and whether executives abused the programs.

It's impossible to know how widespread the abuse may be, but experts point out that the various compensation programs were used by corporations large and small -- and details were often worked out by the managers themselves instead of independent board members.

"I think a lot of times a lot of boards are dominated by the chief executive, and a lot of these programs are simply under the table," Elson said. "They're referred to in vague clauses in the contract and it's probably not reviewed by the board in great detail."

The crackdown will affect not just abuse of loan and relocation programs and other perks, but the extent of the perks themselves, which many shareholders now call excessive.

"I think the tide has turned on executive compensation," said Lowell Peterson, a lawyer who specializes in compensation and labor issues. "We see the dramatic examples of the failed and defrauded companies which not only lined the executives' pockets when they were there, but lined them after they left."

Tyco has been under pressure since Kozlowski resigned over the summer and was charged with sales tax fraud in connection with purchases of pricey works of art.

But even companies that haven't faced scrutiny for actions by their executives or allegations of accounting irregularities are now more likely to take a much closer look at what their top managers are receiving.

"Just because you're not in the headlines doesn't mean you won't be tomorrow," Peterson said.

While General Electric Co. still ranks in business circles as among the best-run companies, and no one is alleging any fraud, it has been put on the defensive by published details of perks its former CEO, Jack Welch is receiving.

Court documents filed last week by Welch's wife, Jane, in their divorce case show that GE still pays for Welch's use of a company-owned Manhattan apartment, courtside seats at the U.S. Open tennis tournament and satellite television systems at his four homes.

GE paid for all expenses incurred at the Manhattan apartment, including food, wine, cooks, wait staff, laundry and furnishings. Jane Welch also cited her husband's use of a Boeing 737 business jet valued at $291,667 per month. Welch's lawyers filed legal papers contending his wife's claims were rife with speculation, but offered no numbers.

The type of benefits Welch is receiving after retirement are commonplace among top executives still working for their companies, said Jerry Reisman, a lawyer who specializes in corporate fraud. Welch has remained a consultant to the company.

"You have continuous use of corporate jets for personal reasons, use of corporate expense accounts for personal reasons, corporate executives having dinner at the best restaurants and putting it on their expense accounts when it's for personal use," he said.

While many executive compensation contracts technically allow the practices, corporate boards are likely to carefully scrutinize whether the executives' actual use of the benefits are excessive, Reisman said.

But perks and compensation that may seem outrageous to average Americans won't go away because top corporate leaders are in high demand, said Ken Bertsch, director of corporate governance for TIAA-CREF, which has $260 billion under management, mostly in pension and education funds.

"There is a competitive market, and (corporations) need to operate in that market," Bertsch said. "These are high-value contributors to the firms in critical positions."

The impact of the Tyco lawsuit, however, could eventually signal the "end of the treatment of CEOs and other senior executives like landed aristocracy," said Paul Lapides, director of Kennesaw State University's Corporate Governance Center in suburban Atlanta.

But he predicted it could take even more headlines of corporate excess to convince board members that their top executives shouldn't be treated like superstars.

"Boards will pay a lot more attention to what is reasonable," Lapides said. But I think an awful lot of board members still don't remember that the CEO is a human being, just like the line workers, the customers and the shareholders."

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