The cult of the CEO (as some business gurus now call it) promoted a celebration
of testosterone and greed that has coarsened the culture and damaged economic
life in severe ways. The adoration of corporate executives--those with a tough-guy
disregard for their employees and social norms--seems to be receding now, along
with stock prices and disappearing profits, but it does resemble a utopian cult,
in which the followers obsessively worship a few strong guys said to possess superhuman
qualities. The major media were taken in, but so were many sophisticates. The
New Yorker published many admiring character studies of these new titans and
even resurrected J.P. Morgan as a worthy icon for our time. Now that icons are
falling all around, it seems daft that so many respectable, presumably rational
citizens fell under the spell. The establishment's first line of defense--"only
a few bad apples"--has been completely crumpled by events. Leaders from finance
are now solemnly promising "business ethics" reforms, anxious to restore "trust"
in a system that runs on other people's money.
William Lerach, the plaintiffs' lawyer reviled and feared by corporate executives,
brings a sharp-edged and refreshingly anti-establishment voice to the emerging
debate over how to reform corporate governance. Based in San Diego, Lerach is
a fiercely opportunistic advocate for victimized shareholders and has brought
hundreds of lawsuits against corporations large and small, usually for fraud.
This is clearly his moment in history. Lerach's list of current defendants starts
with Enron, WorldCom, Global Crossing, AT&T, Lucent and Qwest, along with
many other firms where investors were duped and burned. His law firm, Milberg
Weiss Bershad Hynes & Lerach, dominates the field and has an active docket
of some 2,000 cases, roughly half of which involve stock-market abuses.
More significant, Milberg Weiss is opening up promising new territory for
class-action litigation that could make Lerach and other trial lawyers into an
important force for corporate reform--lawsuits that curb the grand larceny but
also change operating routines and power structures within companies. The law
firm has already won a string of minor victories in which corporations, in addition
to paying cash settlements, were compelled to adopt various internal reforms--some
of the same governance reforms that shareholder advocates have been pushing for
years in proxy fights, usually without success.
In the present climate, Lerach and partners propose to up the ante. They are
aggressively recruiting major pension funds and labor unions as plaintiffs with
the promise that shareholder litigation can produce major reforms in corporate
behavior--far beyond anything Congress is likely to enact or that the "self-regulating"
measures proposed by financial leaders would accomplish. Their venture is untested,
but has a potential to generate real leverage over the titans and a measure of
power for victimized groups like investors, workers and communities.
As Lerach discusses the current scandals, one begins to grasp why he evokes
fear and loathing in the executive class. He has a simple explanation for what
generated the greedy excesses--the bloated CEO salaries and stock options, the
insider loans and fraudulent bookkeeping to pump up stock prices. "Penis envy,"
he said. "I don't want to use the term, but that's almost what it is. It's like,
'Gee, when the CEO of that company over there is making $20 million, I ought to
make $24 million.' Then the other guy says, 'Well, if he makes $24 million, then
I've got to make $30 million.'"
Corporate moguls, Lerach explained, have a character flaw that is often fatal.
"The CEO ultimately gets brought down by the very personality characteristics
that made him successful in the first place," he said. "How did these guys get
to the point where they control a big public company? It's not because they take
no for an answer. Their whole life has been fighting and overcoming people who
say no, you can't do it, don't do it, it's illegal. These guys say, 'To hell with
you, we're doing it, we're getting it done, nobody can stop me.'" And, when they
get to the top, nobody dares stop them.
What these animal spirits need is "adult supervision," Lerach observed. He
envisions a system of discipline imposed by independent overseers, inside and
outside the corporation, with the power to say no and make it stick. But Lerach
doesn't expect much help in this from either reform legislation pending in Congress
or from the Securities and Exchange Commission, which he has observed over the
years steadily weakening the original intent of the securities laws enacted in
the 1930s. "Since I view myself as a traditional liberal, I ought to be in favor
of enhanced government regulation, but I no longer believe in that," he said.
"Because the regulated industries capture the regulators all the time. I don't
care what rules you write. With an army of highly paid lobbyists permanently in
Washington, they're too powerful, too permanent."
Obviously, he said, the most effective reform is sending executives to prison,
though Lerach doubts this will happen either. Prosecutors are either too timid
or outgunned by the platoons of pricey defense lawyers. "There is no criminal
accountability for white-collar crime at that level; there simply isn't any,"
Lerach said. "The head of J.P. Morgan Chase does not give a crap if he gets caught
in Enron and he has to use the Morgan shareholders' money to settle $2 billion
in civil claims. He's still going to have his four homes; he's still going have
his $300 million, his yacht, his life. You put him in jail for three years--not
that I'm trying to pick on [CEO William] Harrison. But if he knew he had a real
credible threat of going to jail for three years, he would behave differently."
If, as Lerach sees it, the regulators, the politicians and the prosecutors
are not up to the task, that leaves trial lawyers to clean up the mess. An obviously
self-interested conclusion, but Lerach said this on behalf of the much-disparaged
trial lawyers: "We may not be perfect, but we are not corruptible. J.P. Morgan
and the accounting industry and the high-tech companies can't buy us off. They
can't stifle us the way they stifle the regulators. If there was a fair, level
playing field for civil litigation, where victims could hold the perpetrators
to account, it's not as powerful as jail time but it would have a prophylactic
Yes, class-action lawyers do reap huge personal fortunes for their efforts,
typically taking a quarter or a third of the cash that plaintiffs win. Yet, looking
back over the past twenty years, trial lawyers seem to be the only successful
reformers in American political life, consistently able to win significant public-interest
victories over powerful business interests (tobacco is the best example). As a
type, trial lawyers are attack dogs, not political theorists, but their leverage
is real because it is based on large sums of money. Conceivably, their influence
could help revive serious arguments about the nature of the corporation and of
financial markets, making public space for fundamental critiques of the system
that for many decades have been confined to academic conferences or kitchen-table
conversations about who runs America.
The deeper debate is urgently needed. If the current swirl of reform actions
succeeds only in restoring the status quo ante--a stock market that investors
once again "trust"--then Americans at large will remain the losers. The problems
of corporate governance are about much more than rapacious egotism. The glorification
of CEOs and their outrageous self-dealings grew directly out of Wall Street's
narrow-minded concept of the corporation's purpose, the doctrine known as "shareholder
value." Starting in the 1980s, corporate raiders (often supported by the major
pension funds) attacked and took down numerous managements on grounds that the
CEOs were too timid about downsizing their companies--that is, squeezing and shedding
workers or discarding viable units of production or slashing long-term research
budgets in order to maximize short-term gains for shareholders and insiders.
In effect, CEOs were told to abandon the company's obligations to other interested
groups and objectives, including the long-term viability of the company itself.
Top executives were sacked if they hesitated, but richly rewarded when they embraced
this new order of shareholders über alles. The theory is used to justify
the inflation of executive pay and stock options--incentives pegged to stock prices
and meant to align CEOs more tightly with the shareholders' objective (making
more money every quarter). The CEO's supposed solicitude for stockholders is now
exposed as a cruel hoax. For investors who were enthralled by the cult of the
CEO, the contagion of financial scandals is Wall Street's version of Jonestown.
The fundamental perversion is a doctrine that encourages managers to squeeze
the other constituent contributors to a corporation's success--taking away real
value from employees, suppliers, supporting communities and even customers--in
order to reward the absentee owners. That twisted logic explains the internal
destruction familiar to those who work for many (though not all) major corporations,
from the researchers to middle managers to assembly-line workers. If this false
doctrine survives reform, then CEOs may no longer be ripping off the shareholders
so boldly, but society's larger long-term interests will continue to be sacrificed
on the altar of "shareholder value."
It is probably too much to expect Lerach to challenge the theory head-on,
since he and many of his clients, the pension funds, rely on "shareholder value"
as an argument for their damage claims. However, his list of corporate governance
reforms--especially the objectives in labor-backed cases--could definitely alter
the balance of power, causing boards of directors to take a broader view of the
company's purpose and to rethink their accountability to employees and society's
values. In any case, Lerach's corrosive view of management is threatening to the
Wall Street order, and so is his utter fearlessness (witness the Enron lawsuit
in which he has targeted nine of the most powerful investment banks as insider
culprits). Indeed, Lerach's edgy intellect is so aggressive it makes some allies
nervous too. "He is very, very smart and aggressive," one labor official said.
"But sometimes you think of a monkey with a razor blade." When I asked Lerach
how he became such a zealous champion of defrauded investors, he spoke without
a moment's hesitation about painful memories of his father.
"My father lost all his money in the '29 crash," Lerach explained, "and it
scarred him for the rest of his life. He became 21 years old in April of 1929,
inherited his own money, went to work as a stockbroker and lost it all [when the
market crashed in the fall], lost his mother's money and lost his aunt's money.
He ended up, like, selling goddamn shoes. Never got over it. He was just one of
those men who were destroyed by the Depression. But, you know, he still loved
the stock market. He always talked about it at dinner."
After law school at the University of Pittsburgh, Lerach joined a "white shoe"
establishment law firm in that city and was further educated about the system
from the inside. He worked on various corporate-finance deals and saw the power
of the CEO's word. He participated in the defense of corporate clients against
several class-action lawsuits, complaints that seemed absolutely meritorious to
him. "We got them thrown out of court and investors didn't get shit," Lerach recalled.
"I saw in those days that, if the plaintiffs' lawyers had two things--money and
brains--they could do it. But money was the most important thing because the companies
have the money." Milberg Weiss, which he joined in the late 1970s, has plenty
During the past few years, in addition to harvesting lots of money, Milberg
Weiss and some other plaintiffs' firms have been rewriting the rules of corporate
governance, company by company, issue by issue. Cendant, a once high-flying conglomerate
recently sued by the California and New York public-employee pension funds, agreed
to make a majority of its directors independent, as defined by the Council of
Institutional Investors. The board's audit, compensation and nominating committees
will be composed entirely of independent directors. The repricing of stock options,
a practice that keeps them whole while the other shareholders are losing, is prohibited
unless approved by the shareholders. Dollar General, settling a fraud claim for
$162 million in cash, agreed to reorganize its board too, with directors standing
for re-election annually and two-thirds of them demonstrating actual independence.
The board can hire its own outside advisers. Top executives must maintain a large
equity stake in the company so they can't avoid personal losses if things go badly.
Wisconsin Energy, heavily fined for environmental violations and lying in
court, agreed to create special internal officers to audit environmental behavior
and various liabilities. They report directly to the board. Samsonite paid $24
million and settled for new controls to prevent insider trading and excessive
executive pay. Its board, two-thirds independent, will meet at least once a year
in executive session, without management. Occidental Petroleum, accused of breaching
its fiduciary duty to protect shareholders, accepted similar reforms and a "lead
independent director" who will oversee the other independent directors. Corrections
Corporation of America agreed to prohibit repricing of stock options and various
insider payments. WellPoint abolished its "golden parachute" payments to top managers.
Calfed eliminated the "special benefits" company insiders were awarded in a proposed
These and other victories demonstrate how a lawsuit's leverage can alter important
points in a corporation's rules and standards, but they do not yet add up to a
major breakthrough (partly because some of the companies were small or bankrupt).
"We are just now at the outset of this corporate governance revolution," Lerach
predicted in a speech last year before the Council of Institutional Investors,
whose members include scores of major public pension funds like California's CalPERS,
most labor pension funds jointly run by union-management trustees, and a few major
companies. The council's newsletter, reflecting the wariness felt by many fund
administrators, once described Lerach's approach as "corporate governance at gunpoint."
He didn't disagree. "Just remember," he said, "oftentimes more is obtained with
a kind word and a gun than a kind word alone."
Some skepticism continues, but Lerach has won an important endorsement from
Robert Monks, the "dean of shareholder activists," as Fortune called him.
"I like Lerach," Monks told me, "but I am frankly not hugely impressed with the
governance accomplishments. However, this is the best game in town, so I am helping
him get new clients and trying to work with him to effect more dramatic governance
For the past two decades, Monks has been a leading theorist and activist in
focusing shareholder proxy fights on the governing rules of major corporations.
He urges the pension funds to drop their passive style of investing and become
aggressively involved in the affairs of the companies they own. Shareholder proxy
fights are also gaining energy from this season of scandals. Twenty percent of
ExxonMobil's stockholders voted recently for a resolution demanding that the oil
giant drop its hostility to global-warming reforms. That was more than double
last year's vote, but it still lost. Shareholder resolutions may influence company
attitudes, but except for rare instances, they do not force much actual change
even when they win, because the companies are free to ignore the stockholder recommendations
and regularly do.
"At least with litigation, if you win, you win," observed Sarah Teslik, executive
director of the Council of Institutional Investors. Teslik shares the ambivalence
toward Lerach and questions whether Milberg Weiss would really push that hard
for governance reforms if it meant accepting a smaller cash settlement. The law
firm has been accused of generating lawsuits for quick settlements that do not
deliver much for plaintiffs, and it was explicitly targeted by the Private Securities
Litigation Reform Act, passed by Congress in 1995 on behalf of Wall Street bankers,
accounting firms and corporate execs. The law requires lead plaintiffs of status
for shareholder litigation, but it seems to have backfired on the moguls. Lerach
simply recruited more prestigious clients like the Regents of the University of
California as lead plaintiff for the Enron case and is more adventurous than ever.
"No question, Milberg Weiss and others are showing the way, even if imperfectly,"
Teslik said. "No question, the corporate lawyers fear Bill Lerach more than they
do the SEC."
Some leading public pension funds are getting over timidity and making more
aggressive demands themselves. CalPERS joined the New York and North Carolina
employee pension funds recently to warn dozens of Wall Street investment firms
that unless they eliminated their internal conflicts of interest, along the lines
that New York Attorney General Eliot Spitzer imposed on Merrill Lynch, the three
funds won't let them manage any of their pension money. Altogether, that represents
more than $400 billion--a huge loss of business for bankers who don't comply.
Feeling the general disgust, the New York Stock Exchange has proposed its own
substantial list of corporate governance reforms to cover the exchange's listed
companies, and its rules embrace many longstanding reform goals of shareholder
activists. "I'm as surprised as anyone," Teslik said. "I've always referred to
them as dinosaurs." These rules, however, apply only to "self-regulation," and
the NYSE has a dismal record in getting tough with the people who pay its bills.
Nevertheless, Teslik noted, the exchange's new rules will provide good ammunition
for enforcement by Bill Lerach's lawsuits.
Lerach is building his own wish list for reforming companies: Require the
rotation of auditors every three years. Install a corporate ethics officer with
real authority and independent reporting responsibility to the board. Also a regulatory
compliance officer with similar power. Rigorous controls to prevent "option flipping,"
insider trading and other forms of self-dealing. A holding period on stock options
that prevents CEOs from cashing out in a falling market when other shareholders
are losing. "These are our companies," Lerach said. "We own them. There are reasons
beyond money to litigate."
Lerach is also examining the widespread mismanagement of 401(k) pension funds.
"I think we may be sitting on a real powder keg here," he said. "In many instances,
while 401(k) money was being shoved into the company's stock, the executives were
bailing out of the company's stock. That doesn't look too pretty in hindsight.
The executives have $50 million or $70 million in their pocket and Joe Sixpack,
who spent forty years working for the company and thought he had $150,000 to retire,
has got $9,000. That's not nice." The pension-fund trustees could be sued for
violating their fiduciary obligations to the employee investors by pushing them
into a stock they knew was in trouble and failing to disclose the true condition
of the company. There are dozens and dozens of these cases, Lerach said, that
would test the limits of the federal government's own pension-fund supervision
and insurance liabilities.
In terms of broader social objectives, some of the most intriguing possibilities
in Lerach's arsenal are the union-backed lawsuits against companies, brought by
workers who are also shareholders, either directly or as beneficiary owners of
pension-fund capital. Union-sponsored pension funds hold about $400 billion (modest
compared with the company-sponsored funds), and Lerach argues that as lead plaintiffs
in securities cases, they can win settlements that force businesses to accept
union-friendly conditions, the right to organize, improved workplace safety, limits
on moving production offshore and other concrete goals. "The labor union pension
funds adhere to a view that I happen to agree with," he said. "Public companies
that allow their workers to organize, treat them fairly and compensate appropriately--you
know what? Those companies do better long-term. They don't get sued for violating
wage and hour laws or civil rights or environmental laws. Good corporate citizenship
pays off in performance. Labor pension funds have every right to advance their
values as investors who happen to be workers. This could be a way for labor to
makes its capital work for it."
A lawsuit backed by the Service Employees International Union against Fruit
of the Loom accuses CEO William Farley and other executives of destroying the
corporation's value with more than $700 million in losses and 16,000 US jobs shipped
offshore, then bankruptcy. The Teamsters are supporting a suit against Overnite
Transportation and its owner, Union Pacific, for violating labor and environmental
laws. The Teamsters, Plumbers and Carpenters unions are suing Cisco Systems executives
for defrauding shareholders by overstating earnings, while selling more than $600
million of their own stock.
The distinctive feature in most of these actions is that the workers, as shareholders,
are suing the executives on behalf of the corporation itself, seeking to recover
wasted company assets and perhaps win governance reforms in the settlements. Al
Meyerhoff, a Milberg Weiss partner who is a former lawyer with the Natural Resources
Defense Council, said that so-called derivative lawsuits "give a whole new line
of attack to labor unions, environmentalists and others to go after corporate
malfeasance. And it hits them where they live because the executives can be held
personally responsible for the damage to the company." Milberg Weiss is applying
similarly aggressive tactics against US multinationals operating overseas. It
has won substantial cash settlements for workers exploited in the notorious Saipan
sweatshops by brand-name clothing makers. "There wouldn't have been any settlement
on Saipan if it weren't for Milberg Weiss," one labor-fund official said. "They
really carry a big stick. The companies treat them viciously because they know
this is real."
Of course, the overbearing power of American corporations is not going to
be dismantled one lawsuit at a time. The larger structural elements of the corporation--the
reach and purpose and unique legal privileges of these large private organizations--are
artifacts embedded in law and politics. They are unlikely to be altered significantly
as long as the alliances of corporations dominate public life so thoroughly, like
latter-day political machines. But what trial lawyers bring to the abstraction
of corporate governance is a sharp new blade that is cutting into some substantive
territory. Together with shareholder activists, labor's working capital, environmentalists
and others, the litigators can help make long-neglected questions of corporate
power visible again, a necessary predicate for new politics.
The financial meltdown has already started a re-education process among victimized
citizens, but, for the most part, progressives were caught flat-footed, not having
developed a coherent vision of what the larger reforms should look like, much
less a strategy for accomplishing them. The trial lawyers do not yet have a grand
theory either, but maybe reformers can help them develop one. Here are some of
the propositions that need discussion:
1. Other people's money. The stock-market system, as it currently functions,
lacks legitimacy for many reasons, but a central one is this: Americans typically
hand over their savings to financial firms that, by their nature, are driven by
self-interested profit objectives and serve other, larger clients (mainly corporations)
in ways that directly conflict with the interests and values of the investors.
The scandals have illustrated these conflicts of interest on a grand scale, but
the fundamental problem can be resolved only with new financial institutions,
not internal rule changes. Ordinary investors need freestanding investment firms
that are trustworthy because they are beholden to only one group--the people whose
money is at stake. A few exist; more are developing. Working Americans are, likewise,
entitled to their own representatives, preferably elected, to oversee their pension
savings--trustees who can influence the investment policies and resist the antisocial
enthusiasms that sweep through corporate boardrooms and Wall Street. Why give
your capital to the known egomaniacs?
2. Governance for whom? If the "shareholder value" doctrine is repudiated,
it must be replaced with a broader understanding of the corporation's purpose,
its obligations to the other constituencies like employees, communities and society
at large--and their right to be heard on major policy decisions. Contentious questions
will have to be settled on how to design such a realignment, but many of the best-run
corporations in America have never forgotten the value of inclusiveness. They
already operate, quite successfully, with an explicit culture of encouraging bottom-up
participation in workplace decisions, even business policy. For the recalcitrant,
reformers might propose a variety of modest steps. Every couple of years, employees
(or other constituents) could participate in a vote of confidence on the CEO's
performance, only advisory and with secret ballots, but a chance to vent and surface
deeper problems. Or communities could have a formal right to petition the board
about larger priorities. As Lerach's reforms suggested, companies could be required
to maintain independent audits of their risk management and environmental behavior,
regularly shared with the public. Is the company ignoring the law? What are the
potential liabilities if it gets caught?
3. Maximizing long-term value. Corporate behavior has been deformed,
especially during the past two decades, by the pressures to generate short-term
gains, and pension funds often participated in the pressuring. The question needs
to be asked: Do pension funds and other institutional investors violate their
fiduciary responsibility to investors and the beneficiary owners of retirement
savings--workers and their families--when they ignore the long-term consequences
of how the money is invested? Fiduciary duty is defined by law quite narrowly--maximizing
value for the beneficiaries--but many corporations maximize returns by doing damage
to society and trashing the very things people need and value in their lives (safe
workplaces, stable communities, a healthy environment). The original purpose of
the corporation is maximizing wealth for long-term benefit, not for the next quarter,
and that principle needs to be restored.
Business professors James Hawley and Andrew Williams elaborated a compelling
new theory, in The Rise of Fiduciary Capitalism, that describes pension
funds as "universal owners," since they invest in all the major corporations across
the stock market and effectively own the entire economy. Therefore, their portfolios
are directly injured by antisocial corporate behavior, and they will pay the cost,
one way or another, of pollution or abusive operating methods even if it yields
profit to a particular company. This perspective invites the possibility of a
challenging lawsuit by inventive trial lawyers and renewed activism to persuade
pension-fund managers to rethink the meaning of their obligations.
4. New ownership. Who really owns the corporation? The historic fiction
that it is the shareholders has been badly tattered by recent events and open
again to critical scrutiny. They own the certificates called "stock shares," but
that's about it. In practical reality, executive insiders exercise the controlling
powers of ownership, usually accompanied by a few financiers and large-bloc shareowners,
and they decide what happens to the returns. So long as shareholders remain distant
from the actual company and ready to dump their shares on short notice, it is
illogical to imagine they will ever exercise wise and patient supervision. In
fact, the destructiveness and inequalities generated by corporations are unlikely
to be reduced until the steep pyramid of power is flattened, with the ownership
distributed broadly among employees and other interested constituencies, including
trustworthy community institutions.
Workers at every level have a unique, intimate knowledge of the firm that
shareholders and even executives can never acquire. The employees also accept
various risks on behalf of the company's future that, unlike the CEO contracts,
are seldom compensated. Employee stock ownership (or cooperatives and partnerships)
can lead to the creation of more democratic systems of management and more equitable
distribution of the rewards. It is not that workers will always get things right,
but that the power to determine a company's direction and purpose is shared more
widely among many minds and voices. The operating values of employees ought to
be more firmly anchored in the surrounding social context and, for that matter,
in common sense. It is hard to imagine that worker-owners could do any worse than
those recently fallen titans.
© 2002 The Nation Company, L.P.