view text-only version

Executive Accountability

One positive trend for workers is the imposition of greater accountability on corporate executives. In the past year, courts dealt with the white collar criminals and their corporate fraud that made headlines earlier in the decade. In addition to these white collar trials, the SEC recently passed a new rule that requires companies to make more accurate disclosures regarding the compensation of top executives.

For many former Enron employees and stockholders, a good deal of closure was achieved in May of this year, as Enron co-conspirators Ken Lay and Jeffrey Skilling were convicted on various charges. On May 25, Lay and Skilling were found guilty of several counts, most notably fraud and conspiracy. While Lay died on July 5, 2006 before receiving his prison sentence, Skilling is expected to be sentenced to 25 years in prison.

When news of the convictions came out, former Enron employees expressed their satisfaction for the conviction, though acknowledging the convictions won’t bring back their lost money.Employees hoped that the convictions would send a message to other corporate chiefs. As one employee pointed out, “It's a victory to show that corporate America can't get away with misleading the public and employees for their own personal gain.”

The architects of the Enron fraud weren’t the only executives held accountable last year. In September, Dennis Kozlowski, the former CEO of Tyco International Ltd., was sentenced to 25 years in prison and was fined $70 million for his role in the misappropriation of Tyco’s corporate funds. Tyco’s CFO, Mark Swartz, received the same sentence and was fined $35 million. The Tyco sentencings followed on the heels of former WorldCom CEO Bernard Ebbers' 25-year prison sentence handed down in July 2005. Ebbers' conviction and sentence were upheld by a federal appeals court this past July.

According to an annual study, more than 15% of the world’s largest companies had a change in their chief executive last year—the highest percentage in the 10 years the study has run. Of those chief executives that left, about 35% were forced out, 44% left voluntarily, and 25% were cut as a result of mergers. Some experts believe that these numbers are positive signs that indicate a “culture of accountability” where boards are willing to remove corporate leaders.


In July, the SEC adopted a new rule that now requires publicly traded companies to disclose new details of executive compensation packages. Under the new rule, companies are required to include deferred pay and retirement benefits when calculating the total compensation package of each company’s top five executives. As an example of a compensation package that must now be included in this calculation, in December of last year, ExxonMobil gave its retiring CEO a $98 million pension payment, in addition to many other pricy perks; this type of package now must be included under a compensation calculation. The new rule will go into effect in mid-December.

Other commentators have urged even more reforms to prevent future corporate scandals, including shareholder votes on CEO pay packages and automatic forfeiture of certain bonuses later discovered to be the result of inaccurate reporting.

Earlier in the year, the AFL-CIO assembled a list of executive pensions in juxtaposition with declining worker pensions. According to the AFL-CIO study, two executives—Pfizer’s Hank McKinnell and ExxonMobil’s Lee Raymond—topped the list with annual pensions estimated at $6.5 million. Of course, McKinnell could opt for the lump-sum payment instead: a cool $83 million.


Also making news in the past year was the prosecution of Ralphs grocery chain over incidents arising out of a 2003-2004 labor dispute. In July, Ralphs pleaded guilty to felony charges and agreed to pay $70 million in fines and restitution for the company’s actions during the dispute, which involved rehiring 1,000 workers under fake names and social security numbers. The company also admitted to violating federal laws concerning identity fraud, conspiracy, pension reporting, and record keeping.

While it would be naïve to conclude that corporate scandals are forever behind us, the Enron and Tyco convictions certainly are a step in the right direction. Since the low point of 2001-2002, additional steps in the right direction have been made to prevent—or reduce in severity—corporate accounting scandals. In addition, CEO pay rules will further increase executive accountability.