Reforms Fail If They Paralyze CEOs

This magazine has strongly supported action to deal with the unprecedented wave of corporate crime and corruption that has devastated investors in recent months. The signing of the sweeping corporate-fraud reform bill by President Bush is welcome news indeed. The legislation not only creates a new oversight board to clean up the accounting profession, it holds CEOs personally responsible for their companies' financial numbers. Given the egregious behavior of some chief executives, there is a huge public demand for CEO accountability. But in the rush to get CEOs to personally sign off on financial statements, we must be careful not to enmesh them in a web of never-ending lawsuits. Demanding decent behavior from our corporate elite is one thing. Pushing CEOs into a permanent defensive posture that curbs their willingness to take reasonable business risks is quite another.

It is certainly true that restoring investor confidence is a top priority. The Securities & Exchange Commission is helping to reestablish that credibility by demanding that 947 CEOs and CFOs of the biggest U.S. public corporations attest under oath to the accuracy of their most recent financial statements at the time of their next SEC filing, which for most is Aug. 14. In fact, it is running a "credibility clock" on its Web site ( with all the companies listed and boxes for CEOs and their CFOs to sign in. As of July 31, it showed that nine have taken the pledge, from such companies as Corning, Qualcomm, PepsiCo, FedEx, and EDS. General Electric CEO Jeffrey Immelt is also signing.

But CEOs have a legitimate worry. Making sure their companies' books are squeaky-clean before they sign on the bottom line will inevitably lead to restatements of corporate earnings, especially between now and Aug. 14 and soon thereafter. In the past, restatements have often led to shareholder class actions. Many have been legitimate but others have not. Some trial lawyers simply launch class actions whenever companies restate their earnings. And keep in mind that reasonable people can disagree within bounds over accounting. The SEC's job is policing those boundaries. If it does its job--and it has recently--the courts don't have to be involved.

CEOs are also worried that since they will now be required to sign off on financial statements, their personal liability will increase in class actions. The Sarbanes-Oxley Act of 2002 increases criminal sanctions on chief executives who falsely certify their books and extends the time investors have to file suits alleging corporate fraud. A bigger concern: CEOs believe they might be accused of perjury under the SEC mandate that they swear under oath to the truthfulness of their companies' books.

There's no denying that CEO liability is murky. Unfortunately it will fall to the courts to clarify this liability and to set principles for reasonable class action suits against corporations as they restate their earnings in the new environment. They must allow business to operate normally without fear of lawsuits. The shock of widespread corporate crime has tarnished the credibility of our nation's corporate elite, hurt the markets, and threatened the economy. The goal now should be to make sure that the cure does not do the same.

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