A CEO World Turned Upside Down

Wednesday, June 1, 2005 - 01:00

Al Driver
The Metropolitan Corporate
Counsel

How would you react if you read a news story about a highly respected CEO
being fired by her board in the wake of allegations of wrongdoing by a
prosecutor or other public official? As you dig down into the details, you find
that those she appointed to the board became so intimidated by possible personal
financial exposure that they quickly distanced themselves from their longtime
friend. You also discover that she has been barred from her office and from
access to the information that she needs to defend herself and that all those
conversations and communications that she had with the company's lawyers, both
inside and outside counsel, are being made available to the government - and,
incredibly, some of her closest friends in management plan to testify against
her in exchange for immunity from prosecution.

This is a scenario that could play out at your company - with your CEO, board
and you being key actors. I encourage you to read the articles that we have
assembled in this issue and on our web site. You will find that Sarbanes-Oxley
extends the reach of the obstruction of justice statute. And, prosecutors can
reach into their tool kits to grant immunity to witnesses and to obtain waivers
of the attorney/client privilege. You will also find that the bulwarks that
traditionally protected reasonably diligent directors from civil liability can
be breached. Settlements may be made contingent on the directors accepting
personal financial liability - thus sidestepping the business judgment rule and
whatever D&O and indemnification protections exist.

There are two ways that general counsel can respond to this situation. The
first is by seeking to create a more level playing field for CEOs to mount a
defense. Great credit goes to the National Legal Center for the Public Interest
for sponsoring a program on May 10 and 11 that provided general counsel with a
forum to exchange views on how to level the playing field. In Part III of our
Special Report on Project: Corporate Counsel (Compliance Readiness) in our July
issue, leading general counsel and our law firm supporters will offer their
suggestions about what can be done.

Second, general counsel should help their CEO protect herself from panic
reactions on the part of directors and management - and an overreaction by
prosecutors. The CEO must first be informed by the general counsel of the
challenges she could face in a crisis of confidence. The general counsel should
then suggest a plan to build confidence in the CEO. This would include setting a
compliance friendly "tone at the top," implementing state-of-the-art internal
control and legal compliance systems and providing general counsel with the
status, staff, tools and reporting relationships required to inspire confidence
that compliance issues will be effectively addressed. This will be discussed on
June 15 at the third in the series of compliance readiness forums being offered
by our law firm supporters. You are urged to attend. See page 36 for details