A Wake-Up Call For Directors

In??the??postscandal??era,??corporate boards of directors have been under close scrutiny and logging twice as many hours. Now the once cushy job could bring a crushing level of personal financial liability as well. That’s the latest tremor to rock the business world. It springs from a deal in which 10 former directors at WorldCom (now MCI) will dig deep into their pockets to settle lawsuits stemming from the phone company’s accounting scandal and plunge into bankruptcy.

Directors are almost never forced to ante up personally to compensate for the losses when a company implodes. But investors suing WorldCom, where the board routinely rubber-stamped decisions by CEO Bernie Ebbers and extended him undisclosed loans worth $400 million, were adamant that the directors feel the pain. To avoid going to trial, the WorldCom 10 agreed to pay a total of $18 million out of pocket, equal to 20% of their net worth, not counting their homes and pensions. Insurers will pay an additional $36 million. Enron directors recently cut a deal that has them digging too. “If directors want to play cheerleader, there’s a price to pay,” warns Patrick McGurn, special counsel to Institutional Shareholder Services.

Some view the extraction of personal assets as harsh in the case of WorldCom, where the directors were never found to have had knowledge of the company’s crooked bookkeeping. (The directors owned so much WorldCom stock that they lost $250 million in its collapse.) In any event, the settlement could influence penalties in other high-profile cases, such as the shareholder suit against Walt Disney Co. directors over the $140 million paid to former president Michael Ovitz. Charles Elson, director of the Weinberg Center for Corporate Governance at the University of Delaware, says the WorldCom deal could have a “chilling effect” by making it tougher to recruit directors. Elson himself is on three boards and says the settlement “creates some introspection” as to whether he should continue. Still, many applaud. “The only chill will be on directors who think it’s a social club,” says Alan Hevesi, New York State comptroller and a leader in the push for directors to pay up. Being a director isn’t what it used to be. But maybe, at last, it’s what it should be. –By Daniel Kadlec