Biz Scandals: An Expert's Account

Nell Minow, editor of the Corporate Library, an Internet site that compiles research about the nature of the modern global corporation, is a corporate watchdog who frequently speaks out on corporate responsibility and governance issues. She has written more than 100 articles on executive compensation and annual shareholder meetings, and she recently testified before the U.S. Senate to discuss corporate responsibility. Minow recently spoke with The Hollywood Reporter's Brooks Boliek to discuss the recent accounting scandals and where investors can expect to go from here.



The Hollywood Reporter: With the focus on corporate scandals ranging from the energy company Enron to the arrest of members of Adelphia's Rigas family and WorldCom executives, it leads one to ask: Are all companies run by crooks?

Nell Minow: It's tempting after the spate of headlines to believe that corruption is pervasive, but I don't really think that's true. I think that it's important to keep in mind that America has more publicly traded companies than the rest of the world put together. We have over 6,000, and just for comparison, Italy has 75. We have to remember that we're dealing with a very serious and troubling small fraction of publicly traded companies.



THR: What is it about telecommunications and media companies such as Adelphia, WorldCom, Global Crossing and now AOL Time Warner that make them more susceptible to these accounting irregularities?

Minow: Telecom and media companies have been very involved in acquisitions over the past decade, and acquisitions are the easiest place to get into trouble with accounting mistakes or accounting cheats.



THR: What specifically makes acquisitions so controversial?

Minow: When you acquire another company, there are a lot of opportunities to swap around the assets and liabilities, to hide some of the bad news. That, in some cases, is the motivation for doing the deal. In the future, we will see the investor community much more discerning. Even GE, which has been notoriously opaque in its financial disclosures, has agreed to be more forthcoming with regards to which revenues are coming from which assets.



THR: AOL Time Warner embraces some of those very issues, especially at the time of the merger when AOL had the huge market value, but the assets of Time Warner were actually worth more.

Minow: It was part of the confusion with that deal. AOL had a stock price at the time that many people thought of as being inflated. When you are in that situation you have two options: You can wait until the market catches up with you and the stock price declines, or you can use your stock price to purchase hard assets to justify your stock price. They chose to go with a company that they thought had a strategic fit because it was a content provider. But there was also a powerful financial engineering motive for that deal. When the accounting rules changed last year requiring AOL TW to take a $54 billion write-down, that showed that AOL got a $54 billion advantage out of the deal that was unjustified by the way we look at valuation now.



THR: What will the government's recently signed corporate responsibility legislation deal with primarily?

Minow: It will address one very small part of the problem, and even then, it will address it by making changes that were already under way. The real question is going to be, who will do the oversight? Are you going to have accountants who understand the issues but who may have conflicts of their own? Or do you have non-accountants, in which case you're going to have to explain to them the intricacies of the generally acceptable accounting principles? Either way, there's a lot of room for inefficiencies or failures.

THR: You said changes were under way already. Are these primarily coming from the New York Stock Exchange?

Minow: Yes, the NYSE is expected to approve some much more meaningful and substantive reform proposals, which will only apply to companies listed on the NYSE. Only 25% of NYSE companies do not have a majority of outside independent directors. This will change that. It will require companies to publish their corporate governance policies. It will require outside directors to meet regularly without management's presence so they can have a candid discussion.

THR: Is there one red flag we should watch for?

Minow: There are several red flags. CEO employment contracts are one. The worst one I've come across was for Global Crossing's CEO, which basically showed a CEO who was betting that the stock would go down and a board that had no capacity to say no to him no matter what he requested. There are some very simple things to look for. If (a CEO) is walking away with the kind of money Michael Ovitz got at Disney, he's a bad bet because he wins whether the company performs well or not. We want a CEO like Lee Iacocca, who says give me $1 a year and some accelerated stock options and I'm going to make everyone rich.


vital stats

Editor of Web site the Corporate Library

Former principal of LENS, a $100 million investment firm that buys stock in underperforming companies and uses shareholder activism to increase their value

Was president of Institutional Shareholder Services Inc., a firm that advises institutional investors on issues of corporate governance

Co-author with Robert A.G. Monks of three books — "Power and Accountability" (HarperBusiness), "Corporate Governance" (Blackwell) and "Watching the Watchers: Corporate Governance for the 21st Century" (Blackwell)