The Post-Enron CEO: It’s Lonely at the Top

Revelations of widespread accounting shenanigans designed to deceive investors and regulators have created a crisis of confidence in corporate America that played a significant role in a breathtaking decline and then prolonged malaise in the U.S. stock market.

Enron. Tyco. Adelphia. ImClone. WorldCom. Global Crossing.

During the past year, Americans have been bombarded with stories of corporate malfeasance at these and other companies on an unprecedented scale. Revelations of widespread accounting shenanigans designed to deceive investors and regulators have created a crisis of confidence in corporate America that played a significant role in a breathtaking decline and then prolonged malaise in the U.S. stock market. These high-profile corporate scandals have also included revelations of deception and greed in the executive suite that turned relatively unknown CEOs Jeffrey Skilling, Bernard Ebbers and Dennis Kozlowski into household names and generated an intense focus on the duties and responsibilities of chief executive officers.

From the ruins of these scandals emerged a sweeping series of new laws and regulations designed to prevent future similar scandals and restore public confidence, placing most of the burden squarely on the shoulders of CEOs. The new rules raise the bar for corporate accountability and place a new emphasis on companies and their executives abiding by enhanced corporate governance standards and procedures. Although the new rules are exceptionally broad and impact many aspects of business, some of the more significant provisions focus on accounting and public reporting, requiring, among other things, that CEOs personally vouch for their companies’ financial statements and public reports. Newly expanded criminal penalties significantly increase the stakes for CEOs who turn a blind eye toward discharging their financial and accounting oversight and disclosure duties. In the bright light of the post-Enron business environment, the long list of CEO responsibilities has grown even longer.

The Rise and Fall

As public company CEOs guided their firms during the stock market bubble of the late 1990s, they faced relentless pressure to grow at unsustainable rates, meet the earnings expectations of Wall Street research analysts and further increase the lofty stock prices to which they and their shareholders had grown accustomed. In too many cases, companies resorted to overly aggressive or even deceptive accounting techniques to help them reach their goals, typically creating the appearance of revenues or earnings that did not exist, or concealing significant liabilities or expenses that did. The failure of accounting standards and guidance to keep pace with the technology boom also created a void for some of the now-fallen mighty to exploit. While stock prices soared, CEOs and other top executives reaped enormous financial rewards, primarily through large salaries and even larger bonuses and stock option grants, but also on occasion through low- or no-interest personal loans that boards of directors frequently forgave, sometimes even unknowingly.

The bursting of the stock market bubble in early 2000 and the slowing of the U.S. economy later that year and into 2001 were events that fed upon themselves, worsening both and exposing to the world the accounting chicanery and flimsy financial structures that had supported some popular companies (Enron, WorldCom, Tyco, Global Crossing and others) and even entire industries (technology, telecommunications). Most recently, the public has been shocked by the details of the egregious financial excess displayed by some CEOs, often while their companies’ stock prices sank to new lows, landing those CEOs on the current list of public villains. Among the disastrous results of these scandals were the largest bankruptcies in history, public dismay at the deception, dereliction of duty and obscene greed in the executive suite, the loss of a vast amount of market value of public securities and an overarching loss of confidence in the integrity of the U.S. markets and corporate America generally.

The corporate scandals may also have ended the acceleration of a phenomenon that began in the 1980s: the rise of what Harvard University’s Rakesh Khurana calls the “charismatic, superstar CEO.”1 Leaders such as Lee Iacocca, Jack Welch and Steve Jobs typified the early superstar CEO phenomenon — flashy self-promoters who achieved celebrity status and developed an almost cult-like following, not only within their own companies, but also in the business press. While they may have set a positive model, others did not follow. As the stock market skyrocketed in the mid and late ’90s, so did the celebrity of many CEOs, aided by the popularity of CNBC and other business-focused television programs that fed the information habit of ever-increasing numbers of individual investors. But also exposed was what Khurana asserts is the downside to the superstar CEOs: “[C]harisma can be blinding. And the consequences of that blindness can be severe.” As an illustration, Khurana offers the deification of Jeffrey Skilling at Enron and the “blind obedience” he apparently induced in his followers. In addition to the management team, “Enron’s board of directors also bent to the will of its charismatic leader when it agreed to suspend its code of ethics to allow top executives to participate in the off-balance sheet partnerships” that played an integral role in Enron’s eventual collapse. According to Khurana, “charismatic leaders reject limits to their scope and authority. They rebel against all checks on their power and dismiss the rules and norms that apply to others. As a result, they can exploit the irrational desires of their followers.”

Among the unwitting victims were those who followed the rules and adhered to good corporate governance models. To be sure, CEOs operated the majority of U.S. companies in an entirely appropriate and ethical manner and justifiably enjoyed the largesse of economic prosperity and the longest bull market in history. But the grievous acts of a few were sufficient to damage the whole and thrust all corporate chief executives under an intense spotlight of scrutiny.

The Legislative Reaction

Lawmakers and regulators shared the outrage of the investing public. As lower-profile but significant securities cases found their way to prosecutors’ desks and criminal indictments accompanied the historically more common Securities and Exchange Commission enforcement actions, the United States Sentencing Commission created more severe punishments under the federal sentencing guidelines for white-collar offenses. The SEC, the stock exchanges and ultimately Congress also sought to restore public confidence by enacting sweeping new laws and regulations designed to vastly improve corporate governance, controls, ethics and accountability in public companies. The new rules directly address the bad acts, executive excess and corporate governance shortcomings revealed by the corporate scandals. In the spring and early summer of 2002, the SEC proposed new rules, and the New York Stock Exchange and Nasdaq began the implementation of stringent new listing requirements. But as the stock market continued to falter during a summer marked by continued revelations of corporate improprieties and accounting irregularities, the White House pressured Congress to act quickly on legislation to address the issues and established a Corporate Fraud Task Force to coordinate criminal enforcement.

At the end of July, Congress passed (almost unanimously) and President Bush quickly signed into law, the Sarbanes-Oxley Act of 2002. This legislation made sweeping changes to the accounting industry and significant, if less sweeping, changes to the public company corporate governance landscape. The President hailed the Act as “the most far-reaching reform of American business practices since the time of FDR.” The Act primarily impacts three areas: the accounting industry; corporate disclosure and governance; and criminal punishment. Outside the accounting industry, those most significantly impacted by the Act are public company CEOs. In an effort to prevent the types of abuses and failures that led to the corporate scandals, Congress has charged the CEO with bearing the burden of restoring confidence in American business by personally vouching for the accuracy of the company’s financial statements and public reports, and backing it up with his personal assets. Congress seems to have adopted the view that “CEOs got us into this mess and they’re going to have to get us out.”

Although most of the Act’s provisions apply directly to publicly- traded companies, privately-held companies are impacted as well. Private companies fall under the purview of some of the new rules and, in particular, the applicability of the new criminal penalty enhancements, when, for example, they engage in private placements to raise capital or provide financial statements to banks to secure a loan. In addition, the Act’s focus on the accountability of senior management provides excellent guidance to the leaders of any enterprise, public or private, who are ultimately accountable to stakeholders, and likely will become the baseline and benchmark “best practices” in corporate governance, controls and ethics that are more important than ever. While private companies are not required to abide by all provisions of Sarbanes-Oxley, the new rules may well become the standard expected by lenders, credit agencies, private investors and business partners.

Whether in a public or private company, in the post-Enron business environment, the CEO is operating under heightened scrutiny by regulators, shareholders and the general public. Sarbanes-Oxley imposes several new requirements, prohibitions and responsibilities directly on public company CEOs (and also CFOs) that arose out of the corporate scandals. Among other things, the Act generally prohibits companies from making loans to them; provides for disgorgement of bonuses, stock option gains and stock sale profits from them if their company is required to restate its financial statements as a result of misconduct and material noncompliance with securities laws; prohibits them from selling stock during certain periods; and requires them to report their permitted stock transactions almost immediately.

But perhaps the most significant new burdens Sarbanes-Oxley places on CEOs, and at the heart of Congress’ attempt to restore investor and public confidence, are the certifications now required by CEOs and CFOs in companies’ public quarterly and annual reports filed with the SEC.

CEO and CFO Certifications Under Sarbanes-Oxley

Following similar proposals by the SEC, and in response to CEO admissions in congressional testimony that they had little awareness of the contents of the SEC reports that they signed and their companies filed, Congress included in the Sarbanes-Oxley Act a requirement that CEOs and CFOs each make two distinct sets of certifications (which are referred to as “Section 906” and “Section 302” certifications) in each Quarterly Report on Form 10-Q and Annual Report on Form 10-K filed with the SEC.

In requiring these certifications, Congress has pushed the CEO into a far more active and detailed role in the preparation of the company’s financial statements and SEC reports than CEOs may have formerly taken, although one that most investors likely always expected of them. In addition, Congress has attached very serious consequences to deliberate misrepresentations by those making the certifications. Although criminal sanctions may result from any deliberate misrepresentation in SEC reports, Sarbanes-Oxley contains specific and severe penalties (fines of up to $5 million and prison terms of up to 20 years) for “knowing” or “willful” misrepresentations in the Section 906 certifications. Historically, there have been few criminal prosecutions of CEOs of large U.S. corporations over accounting issues because prosecutors generally would defer to the SEC as the principal enforcer of the federal securities laws. That, too, has changed as prosecutors respond to congressional and public pressure for federal criminal prosecutions. Where CEOs typically focused on big picture operations and were not part of the paper trail linking executives to a crime, Sarbanes-Oxley facilitates the link.

The CEO’s Burden

The detailed certifications required of CEOs by Sarbanes-Oxley (and the serious repercussions of failure in that regard) force CEOs to add a layer of detail to the discharge of their duties that they often did not apply before. A public company CEO must now take a much more active role in the preparation of his company’s SEC reports and must have a thorough understanding of the company’s accounting policies and the assumptions underlying the preparation of the financial statements. To help CEOs fulfill their obligations, companies should put into place a system of due diligence in the preparation of SEC reports that provides adequate back-up to the certifications required by the CEO and CFO. Most public companies are likely to utilize some form of “sub-certifications” from more junior members of the management team who are responsible for discrete portions of the report. But the likely defense of Messrs. Skilling, Ebbers and Kozlowski that they left it to their subordinates to ensure that the accounting and reporting were proper will no longer fly. While it is not the death knell of delegation, CEOs must now be more circumspect as to what tasks can be appropriately delegated.

CEOs now must meet regularly with the CFO, outside accountants and other senior officers working on the financial statements and SEC reports, and ask probing questions to evaluate the process and ensure accuracy. To do so, CEOs must possess, or quickly develop, an understanding of accounting principles and the application of those principles and various assumptions and estimates in the preparation of financial statements. This can be particularly difficult for CEOs who may have risen from a marketing, sales or legal background as opposed to a finance or accounting background, and who are now required to educate themselves in this area. The CEO must sustain the burdens of self-education and significantly increased involvement in preparing financial statements and SEC reports while continuing to perform the traditional responsibilities of CEOs: planning long-term strategy (by anticipating changes in the company’s products, services, distribution channels, clients, technology and competition), motivating personnel, managing the managers, establishing a corporate culture, reporting to the board of directors and dealing with the investment community.

How is the CEO to fulfill his new duties with regard to financial statements and SEC reports while manning the wheel of the corporate ship? Must he now also understand how to repair the ship’s engine as opposed to relying on the engine room? The answer is: probably not, but he should know enough to ask the right questions, assess the adequacy of the procedures and bear the ultimate responsibility if it is not done correctly. The bottom line is that it is going to take time. The post-Enron CEO is simply going to have to spend more time at his job than he did previously and employ the “NIFO” method to his increased financial, accounting and public reporting responsibilities — i.e., “nose in, fingers out.”2

Among the internal consequences to CEOs who fail to shoulder this burden is likely to be removal from office by newly empowered, activist boards of directors. The corporate scandals have also awakened corporate boards, which soon must be comprised of a majority of independent, outside directors. Gone are the days of rubber-stamp boards and cozy, wink-wink relationships with management. Post-Enron boards are expected to be strong, independent, active boards, demanding much more from CEOs than in the past. They are also more likely to use a quicker trigger to fire CEOs who don’t produce results while meeting their new responsibilities and strictly adhering to the highest ethical standards. Turnover in the ranks of CEOs is likely to increase over the next few years.

The role of the chief financial officer in righting the corporate ship should not be ignored. CFOs face the same criminal penalties as CEOs for material deficiencies in the certifications. But the CFO does not have to leave his comfort zone to the same extent as many CEOs in order to make the certifications and vouch for the financial statements — the CFO typically takes the laboring oar in the preparation of SEC reports. The CFO may take little comfort in that fact, however, when his personal assets and freedom are on the line. But CFOs ought to be thankful for one aspect of the new certification requirements: they ensure that CFOs are not acting alone. Before the new requirements, a CEO like Bernard Ebbers could (and likely will) deny that he was intimately familiar with the contents of WorldCom’s SEC reports because he had no legal obligation to do so, relying instead on the careful work of his subordinates. The certifications now require an appropriately high level of direct involvement and familiarity by the CEO in these matters. If Mr. Ebbers had paid the kind of attention to WorldCom’s financial statements and SEC reports now required by Sarbanes-Oxley, it may be less likely that Scott Sullivan (WorldCom’s former CFO) would now stand indicted for their alleged shortcomings.

Truth or Consequences

The CEO clearly is faced with a heavy new burden. So what are the new consequences for failures or abuses like those that led to the corporate scandals? The answers lie in two places: the criminal provisions of the Sarbanes-Oxley Act, and, separately, the U.S. Sentencing Guidelines. Many look to the new high-profile criminal penalty provisions of Sarbanes-Oxley with great trepidation, as well they should, where statutory maximum periods of incarceration catapulted from five to 20 and 25 years depending on the offense. While those prison terms have received extensive play in the media, even before passage of Sarbanes-Oxley the U.S. Sentencing Commission significantly modified its Sentencing Guidelines. The Guidelines apply equally to public and private companies, as well as their respective principals, and now also provide significantly tougher penalties for corporate managers.

The Guidelines have virtually morphed potential halfway house sentences, or four- to five-year stays at Club Fed, to legitimate 15- to 20-year sentences. In fact, many commentators have noted how the effect of the strengthened Guidelines was to create a higher base offense level for the white- collar criminal than for the mid-level armed narcotics trafficker. By shifting covered corporate and securities offenses to the provision governing embezzlement and offenses involving fraud or deceit, a first-time individual defendant could now face imprisonment for a term between 19 and 24 years. The corresponding criminal fine for a corporation, independent of any order of restitution and probation, could be as high as $290 million under the Guidelines. In fact, the new Guidelines treat large securities fraud more harshly than some street crimes. Against this backdrop, Congress, in Sarbanes-Oxley, still directed the Sentencing Commission to review the Guidelines applicable to those offenses addressed in the Act to ensure that they adequately reflect the seriousness of the offenses and adequately deter and punish the offenders. Congress specifically directed the Sentencing Commission to review the Guidelines for the offenses of obstruction of justice, fraud endangering the financial security of “a substantial number of victims,” and securities and accounting fraud. So, if 19 to 24 years for individuals and $290 million for corporations are not enough, Sarbanes-Oxley has charged the Sentencing Commission to decide how much more and what else.

In addition to mandating the review and amendment of the federal sentencing guidelines, in Sarbanes-Oxley, Congress also created new federal crimes and increased penalties for existing federal crimes. The titles of the provisions of Sarbanes-Oxley are eye-openers themselves — “Corporate and Criminal Fraud Accountability Act of 2002” (Title VIII), “White-Collar Crime Penalty Enhancement Act of 2002” (Title IX), and “Corporate Fraud Accountability Act of 2002” (Title XI). What some may call the Arthur Andersen obstruction law is Section 802, which amends the obstruction of justice statute by adding two new offenses. One makes it unlawful to knowingly alter or destroy documents with the intent to obstruct or influence any federal investigation or bankruptcy proceeding — the most compelling words in the statute then follow — “or in relation to or contemplation of any such matter or case.” Over time, we will learn a prosecutor’s definition of “contemplation”; meanwhile, the offense is punishable by up to 20 years of imprisonment and/or a fine. The second new offense, aimed at accountants and the destruction of audit records, obligates accountants to maintain corporate audit records or work papers for five years. How do these new offenses impact CEOs? Simply, the collateral effect of this law may be more documents subject to discovery by plaintiffs’ class action lawyers, and federal and state, civil and criminal, investigators.

Sarbanes-Oxley also amends the mail fraud statute to add a specific section relating to securities fraud. It is now a violation of the mail fraud statute to “knowingly execute, or attempt to execute, a scheme or artifice (1) to defraud any person in connection with any security of an issuer…” or “(2) to obtain, by means of false or fraudulent pretenses, representations, or premises, any money or property in connection with the purchase or sale of any security of an issuer….” The amended mail fraud statute eliminates the purchase or sale element in Section 10(b) of the Securities Exchange Act of 1934 and simply requires that a person “defraud” the victim. With a 25-year maximum prison term and/or a fine and fewer proof elements, federal prosecutors have an important new tool to use against executives of public and private companies in connection with, among other things, capital-raising activities.

In addition to creating new crimes, Sarbanes-Oxley also significantly toughens the consequences for violations of existing crimes. The Act increases the maximum jail term for actual, attempted or conspiracy to commit mail and/or wire fraud from five to 20 years. The Act amends the obstruction of justice statute to make it a crime to corruptly alter, destroy or conceal a document with the intent to impair the object’s integrity or availability for use in an official proceeding or otherwise obstruct any official proceeding. The offense, and an attempt to commit obstruction, now carries a potential penalty of 20 years of imprisonment and/or a fine. More specific to public companies, the Act increases the maximum penalties for violations of the Exchange Act from 10 years of imprisonment or $1 million, or both, to 20 years of imprisonment or $5 million, or both. The maximum fine for an entity’s violation of the Exchange Act increased tenfold, from $2.5 million to $25 million. Finally, “knowing” or “willful” misrepresentations in the Section 906 Certifications now required by CEOs and CFOs in quarterly and annual reports are punishable by up to 20 years of imprisonment and/or a $5 million fine.

As if the significantly increased responsibilities now placed on CEOs weren’t difficult enough, the consequences of failure to meet those responsibilities makes the CEO’s task that much more daunting.

Will Coping Be That Bad?

Perhaps in the post-Enron, post-bubble environment, coping with this additional layer of CEO responsibility may not be as difficult as it seems at first blush. Some of the bubble-era motivations that led to the scandals and placed CEOs into this predicament in the first place have abated somewhat. Investors’ expectations are now tempered with a dose of reality — after two (likely three) years of losses, many experts expect annual stock market returns in the 5% to 8% range over the next decade, a major retrenchment from the heady days of 20% to 35% annual gains of the S&P 500 between 1995 and 1999. Wall Street firms are under investigation by the NASD, the Manhattan District Attorney and the New York State Attorney General for a range of alleged abuses, centered mostly around the activities of their investment banking units and research analysts, including their relationships with CEOs. With the release of these pressure points, which were among those at the roots of the accounting scandals, CEOs may have more time to focus on operations as well as their new responsibilities without these distractions. This is not to suggest that today’s investors won’t continue to demand exceptional returns on their investments, but in this environment, exceptional returns could be the reward for companies that focus on operational efficiencies, ethical executive behavior, trustworthy financial statements and reports, and steady, not flashy, growth.

Leadership Means Responsibility

The post-Enron CEO carries a heavy burden. He is almost single-handedly charged with restoring public confidence in corporate America that was destroyed in embarrassing, high-profile scandals at some of the nation’s leading companies. As if he didn’t have enough on his plate already, the post-Enron CEO must play a more active role than ever in the preparation of his company’s financial statements and SEC reports. If he is not already, he must become well versed in finance and accounting matters, sufficient to allow him to publicly vouch for his company’s financial statements in the face of draconian consequences for failing to do so.

Today’s CEO must be very different from his pre-Enron predecessor. The corporate scandals have proved in spades Rakesh Khurana’s premise, that the “charismatic, superstar CEO” who developed huge popular followings often did not serve his company and shareholders well. Corporate reform legislation has curbed his power and public outrage may have buried him. The post-Enron CEO must return, to a certain extent, from the sexier world of long-term strategic thinking to the more mundane and fundamental task of ensuring the accuracy of financial statements. His watchwords should be involvement, communication, understanding and honesty, and by employing these, the post-Enron CEO should successfully bear his burden. But it will not be easy in this new era characterized by no tolerance for ignorance and no excuse for inaction.

New Certification Requirements Checklist:

Section 906–Certifications:
Section 906 of Sarbanes-Oxley requires the CEO and CFO to certify that:
– The SEC report “fully complies” with the requirements of the Securities Exchange Act of 1934; and
– “The information contained in the report fairly presents, in all material respects, the financial condition and results of operations of the company.”

Section 302–Certifications:

Section 302 certifications are much more detailed than the Section 906 certifications and require the CEO to take an active role in the preparation of the SEC report and the company’s financial statements in order to make them. The Section 302 certifications require the CEO and CFO to certify that:
– they have reviewed the periodic report;
– “based on their knowledge, the report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements in the report not misleading;”
– “based on their knowledge, the financial statements and other financial information included in the report fairly present in all material respects the financial condition and results of operations of the company;”

“are responsible for establishing and maintaining disclosure controls and procedures (i.e., controls and procedures designed to ensure that information required to be disclosed by the company in its periodic SEC reports, is recorded, processed, summarized and reported within the required time periods. These controls cover a broader scope of information than just financial information, including developments and risks that pertain to the company’s business, such as trend information, and must ensure that such information is accumulated and communicated to management to allow timely decisions regarding required disclosure).”
– have designed such disclosure controls and procedures to ensure that material information is made known to them;
– have evaluated the effectiveness of the company’s disclosure controls and procedures within 90 days of the date of the report; and
– “have presented in the periodic report their conclusions about the effectiveness of the disclosure controls and procedures, based on their evaluation;”
– they have disclosed to the auditors and to the audit committee:
– “all significant deficiencies in the design or operation of internal controls (as distinguished from the “disclosure controls,” “internal controls” refers to accounting controls used for financial reporting) which could adversely affect the company’s ability to record, process, summarize and report financial data, and have identified for the auditors any material weaknesses in internal controls; and”
– “C22 any fraud, whether or not material, that involves management or other employees who have a significant role in the company’s internal controls; and”
– “they have indicated in the report whether or not there were significant changes in the internal controls or in other factors that could significantly affect the internal controls, since the date of their evaluation, including any actions taken to correct significant deficiencies and material weaknesses.”


  1. Rakesh Khurana, “The Curse of the Superstar CEO,” Harvard Business Review (September 2002). 

  2. Dr. Timothy S. Mescon, Dean, Coles College of Business, Kennesaw State University. 

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