With rock music pounding and lasers painting a brilliant light show on giant screens behind him, Patrick J. Gnazzo restlessly paced the broad stage at the Venetian's convention center in Las Vegas. Because he is the new chief compliance officer at Computer Associates International Inc. (CA), Gnazzo's presentation was one of the main events just before CA World, the company's annual sales extravaganza. Striding before 1,200 CA staffers, the blustery 59-year-old former chief trial attorney for the U.S. Navy took a page from tent revivalists, leading a call-and-response chant: "What happens at CA World," Gnazzo shouted, as the crowd echoed his words, "can make us great." Winding up his talk, he exhorted: "Don't lie, don't cheat, don't steal!"
CA staffers can thank the Justice Dept. for Pat Gnazzo. To avoid a criminal trial over alleged accounting fraud, CA accepted a deferred prosecution agreement in late 2004 that required it to set aside $225 million for shareholders and impose a variety of reforms, including hiring an internal cop to prevent future chicanery. The job went to the Jesuit-trained Gnazzo, who once considered the priesthood but instead opted for the law. At the $3.5 billion-a-year Islandia (N.Y.) management-software provider, he reports directly to the board's audit committee, as well as to the general counsel, and can buttonhole any manager from chief executive officer on down. "I have unfettered access," says Gnazzo, who earned total compensation in excess of $675,000 last year.
Gnazzo is among the more visible examples of a new species of executive: high-profile former government lawyers and judges who have been tapped, usually by scandal-tainted companies, to police employees. Others in this group include former Securities & Exchange Commission Chairman Richard C. Breeden, who was named outside monitor of KPMG in August and is now taking a similar role at Hollinger International Inc. (HLR) Eric R. Dinallo and Beth L. Golden, alumni of New York Attorney General Eliot Spitzer's office, have taken jobs at Morgan Stanley (MWD) and Bear, Stearns & Co. (BSC), respectively.
While titles and responsibilities may vary, all have unprecedented power to throw their weight around, much more than a typical ethics officer or in-house compliance chief. Breeden, for example, was installed for a three-year term after KPMG moved to stem an embarrassing tax-shelter sales scandal. He can review confidential internal documents, interview any official he wishes, and even fire executives whom he believes are guilty of fraud.
Regulators are counting on Gnazzo, Breeden, and their ilk to trigger a genuine change in corporate behavior. But will they be any more effective than the corporate cops who preceded them? Ombudsmen, ethics honchos, and compliance managers, after all, have not proved to be an enormous deterrent to wrongdoing. Enron boasted an unusually detailed 62-page code of ethics that was aimed at helping to protect the outfit's "reputation for fairness and honesty," as former Chairman Kenneth L. Lay put it.
While corporate cops can never put an end to fraud, there's good reason to believe that the new breed are going to be much more than just window dressing. Start with their résumés. The previous generation of compliance officers tended to come up through the ranks of human resources and had little visibility inside or outside their companies. By contrast, Gnazzo, the former vice-president for business practices at United Technologies Corp. (UTX), arrived at CA with a well-established reputation and a preexisting store of credibility with government officials (NVS).
Now that he has been at CA for just over a year, Gnazzo agreed to discuss his operation in detail with BusinessWeek. The first compliance officer in the history of the company, he is in the process of building a big team. His 14-member department is about to be supplemented with 20 compliance deputies, who will provide local eyes and ears in CA's operations in 45 countries. During his tenure, Gnazzo's group has handled more than 100 cases and taken "corrective actions" -- including a "substantial number" of firings -- against 70 staffers. (Gnazzo declined to discuss the details of these inquiries.)
Gnazzo, who feels duty-bound to decline most invitations for after-hours socializing with colleagues, is often tapped for informal advice. Recently a senior CA executive was troubled that an outside business associate, learning of his son's passion for a certain rock band, bought concert tickets and sent them as a gift. Arguing that this was worlds apart from joining a client in a stadium guest box where business could be discussed -- an acceptable invitation -- Gnazzo advised the man to pay for the tickets.
Old-style ethics officers reported to managers far down the ladder. Gnazzo has the power to go right to independent directors with problems. Whenever needed, he can quiz CEO John Swainson, the former IBM (IBM) vice-president who joined CA to clean it up. He also confers regularly with the CEO and five other top officers on a new disclosure committee that meets to talk about SEC filings and news releases. One issue Gnazzo has discussed with senior management: whether so-called side-letter deals -- the arrangements outside of formal sales contracts that can lead a company into trouble -- are appropriate (in rare cases, Gnazzo says, the answer is yes).
Some argue that the new set of inside cops has too much power. Members of the criminal defense bar fret over what one group, the National Association of Criminal Defense Lawyers, calls "unprecedented levels of ongoing prosecutorial oversight" over corporate decision-making.
But Gnazzo tries to operate with a lighter touch. While it is his responsibility to police managers, he tries not to be perceived as an outsider. Even though he has the ability to go over Swainson's head, for instance, Gnazzo doesn't expect he'll need to do so. "I've never been in a situation where I had to do anything more than to say to a CEO, 'You know you did something I don't think is right,"' he says. Typically, he adds, senior managers discreetly quizzed about, say, potential sexual harassment or expense-report problems straighten out quickly if they want to keep their jobs.
Gnazzo would rather prevent headaches than punish miscreants, an approach that demands discretion. While at UTC, he says, a staffer complained that an executive planned to make a flawed presentation to high-level managers. "I know we're faking the numbers," the staffer told Gnazzo, adding that his boss was making him "fake the numbers to our own senior managers."
Without suggesting there was a whistleblower, Gnazzo diplomatically reminded the executive that inaccurate presentations wouldn't pass muster. The result: The executive fixed the presentation before delivering it, Gnazzo never had a problem with him, and the staffer escaped recrimination. Like a cop on a beat who handles a problem without making arrests, he says, "I had to work it very sideways."
By Joseph Weber