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Correction to This Article
A Jan. 7 Business article on the liability of corporate directors misstated the role of Clifford L. Alexander Jr. on the board of Wyeth. Alexander is a member of the drugmaker's audit committee, not its chairman. He chairs the company's committee on corporate issues.
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Blame for Scandals Entering the Boardroom

Until the Enron and WorldCom settlements, the idea that directors would pay a penny of their own money to shareholders was almost laughable. Stanford University professor Michael Klausner has studied the issue and said directors paid out of pocket around five times in the past 35 years. "You are talking about needles in haystacks," he said. "The numbers are very small."

Many observers applaud the apparently toughening standards. Others worry they will scare qualified candidates away from serving on boards. "The directors and director candidates I talk to will ask, 'Are we setting a precedent under which I will be held personally liable for something that I had little control over?,' " said Joe D. Goodwin, president of the Goodwin Group, a consulting firm that specializes in chief executive and director searches.

_____Post 200 Profile_____
MCI Inc.
_____Graphic_____
WorldCom Q&A
WorldCom History
_____MCI Coverage_____
Former Directors Agree To Settle Class Actions (The Washington Post, Jan 8, 2005)
10 Ex-WorldCom Directors Agree to Settlement (The Washington Post, Jan 6, 2005)
Judge Says MCI Broke Pay Rule (The Washington Post, Nov 25, 2004)
Story Archive and Company Background

In the case of the tentative WorldCom settlement, however, several analysts discounted the possibility of a chilling effect.

They said the magnitude of WorldCom's collapse puts the company in a much higher echelon of misbehavior than most other firms. In addition, the judge overseeing the WorldCom class-action suit issued an opinion last month saying a registration statement filed by WorldCom with the Securities and Exchange Commission prior to a bond issue in 2001 included "false and misleading" information.

Henry T.C. Hu, professor of corporate and securities law at the University of Texas at Austin, said that under federal securities law, directors and underwriters could be held personally liable if they signed falsified registration statements.

Hu said that unlike under other legal provisions, plaintiffs in this instance do not need to show that the directors acted with any malicious intent. Instead, directors must show that they conducted a thorough review before signing the registration statement and could not have known about any misstatements.

Klausner of Stanford said the WorldCom directors probably settled because they feared their liability would be much higher if they went to court. "The directors would not have settled unless they thought there was a reasonable chance of losing at trial, which means they knew their facts were bad," he said.

Klausner also said the plaintiffs may have been eager to settle because they feared insurance companies would balk at paying if a trial showed the directors committed fraud. He said the lead plaintiff in the WorldCom case, the New York state public pension fund, also had an incentive to limit the directors' liability.

Had the case gone to trial, Klausner said, directors could have wound up losing everything. Under the terms of the settlement, however, the directors will pay more than 20 percent of their net worth, excluding the value of their primary residences and retirement savings. Klausner said institutions such as the New York pension fund "are the ones that are calling for more independent directors and a greater role for them. . . . So pushing too hard on independent directors could be very counterproductive."

Meanwhile, board members are still at far less risk than corporate executives directly responsible for financial misdeeds. Directors with no ties to management rarely face criminal charges because prosecutors must prove they acted with criminal intent, rather than just lazy indifference.

And directors at several scandal-scarred companies continue to hold board memberships at other firms. Former Enron director Norman P. Blake Jr., for instance, remains chairman of the audit committee at Owens Corning. Former Enron board member Frank Savage stepped down from his directorship at Qualcomm Inc. but remains on the board at Lockheed Martin Corp.

Some WorldCom directors who have agreed to the tentative settlement also hold other board seats. Former WorldCom director Clifford L. Alexander Jr., for example, is the chairman of the audit committee at drugmaker Wyeth. A spokeswoman for the company declined to comment on whether the settlement would have any impact on Alexander's board service. Alexander did not return phone messages left at his home.

In addition, legal experts note that previous crackdowns on director behavior have often led to new laws to further insulate board members. For instance, when a Delaware judge in the 1980s found directors liable for violating their duty of care, the state legislature responded by passing a law allowing shareholders to vote to eliminate financial liability for similar duty-of-care violations.


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