ACS Conference

Friday, June 18th, 2004

Enron and What Has Gone Wrong in Corporate Culture

Charles Burson General Counsel, Monsanto

Scott Harshbarger

Murphy, Hesse, Toomey & Lehane

Kimberly Krawiec Professor of Law, University of North Carolina

Jonathan Molot

Professor of Law, George Washington University

Melvyn Weiss Milberg Weiss Bershad & Schulman

Jonathan MOLOT, Professor of Law, George Washington University, Introduction: Ok, I want to welcome you all to this panel on Corporate Responsibility and Corporate Governance. And, I want to say how pleased I am to be here at the American Constitution Society convention and, specifically, to be moderating this panel, both because of just how important the issue is and because of what a great group of panelists ACS has been able to pull together. The scandals that have made front-page news in recent years have affected not just shareholders, and employees, and retirees at companies like Enron, and World Com, and Tyco, they’ve really rocked our financial markets. They’ve affected our economy more broadly, it’s a huge deal, and we hope affected the way business is going to be done going forward.

What’s amazing about this is that it’s a huge scandal, it’s a huge issue that’s important on Capital Hill, on Wall Street, and on Main Street, and lawyers are going to be at the center of any solution, any resolution -- any progress we make is going to depend largely upon lawyers. We’ve seen lots of lawsuits against corporate offenders. We’ve seen corporate law reform efforts before Congress and in administrative agencies, and we’ve seen a change in a new era of corporate governance and corporate compliance measures that corporations are starting to implement. And lawyers are at the center of all of these moves. We are fortunate enough today to have people that are leaders in their fields, but have seen this issue from a variety of different perspectives. They’ve really seen it, come at it from different angles, both within their careers, and when you compare their careers. And I’ll introduce each individually as he or she speaks. But, just so you get a sense of how lucky we are to have these people, we’ve got Charles Burson, who’s looked at this from the inside as General Counsel of Monsanto and has also served in the highest levels of government, federal and state, advising President Clinton, Vice President Gore and serving as state Attorney General for the state of Tennessee. We have Scott Harshbarger, who is advising corporations now from the outside, helping them set up corporate compliance schemes. And he’s also been a leader in the corporate responsibility movement for some time in the public interest community as head of Common Cause and as the Attorney General of Massachusetts. We have Kim Krawiec, who is a leading scholar in corporate and securities law, who is on faculty at the University of North Carolina, has been teaching at Harvard this year, and has done some work that I think will surprise many of you about what are the effects, what is the value of these corporate compliance measures that people have put into place. And then we have Mel Weiss, of Milberg Weiss and I think the name says it all. Milberg Weiss is the dean of class actions and all of these lawsuits that we talk about, he’s represented parties in most of the big lawsuits against corporate wrong doing, so essentially, we’ve seen lawyers involved at different points in the process and I really look forward to hearing what they have to say. The first person we’ll have speak is Charles Burson. He’s currently Executive Vice President, General Counsel and Secretary of Monsanto, a biotechnology agricultural firm in St. Louis Missouri. We’ve all heard of it. He served from 1999 to 2001 in the White House, that one you’ve definitely heard of as well, I would think, as assistant to President Clinton and Chief of Staff and Counselor to Vice President Gore, and served as Legal Counsel for Vice President Gore from ‘97 to

‘99. From 1988 to 1997 he held the position of Attorney General for the state of Tennessee and served as the President of the National Association of Attorneys General in ‘94 and ‘95. While Attorney General of Tennessee, Mr. Burson presented four arguments to the U.S. Supreme court, most notable of which are Payne vs. Tennessee and Burson vs. Freeman. He was in private practice in Memphis, Tennessee before that, from 1970 to 1988, received his B.A. from the University of Michigan, his M.A. from Cambridge University, and his J.D. from Harvard Law School. He’s married to Bonnie Burson, they’ve got two daughters, Kate, age 24, Clare, age 28 and I turn it over to you. Charles BURSON, General Counsel, Monsanto: Yeah, I looked at this panel and the title of it, “Enron, What’s Wrong with Corporate America,” and I feel a little bit like I did as the corporate representative up here when I argued my first case before the Supreme Court. It was a death penalty case. I was representing Tennessee as Tennessee Attorney General and in the course of the argument, Justice Kennedy looked down at me and said, “Well as a career prosecutor, do you think this was appropriate conduct?” I had been an attorney general for two years. Before that I was in private practice as a criminal defense lawyer and a commercial lawyer, and I froze. What do I do, do I go and answer, it’s implicit in, as he said a career prosecutor…do I take that issue up, anyway… Laughter I’ll finesse it, so I came from the White House as, lastly, Chief of Staff for, Gore and I jumped from the pot into the frying pan as General Counsel, and I’ve been there three years, so I feel a little bit like I did when I was asked to represent the prosecutorial point of view. Let me give you my view on both what’s unfolding, you’ll get, I think better views maybe about why we are where we are, given insight in terms of how I think over time this is both good and bad, particularly for lawyers, particularly for General Counsel, people that represent corporations in the private bar, in the commercial and corporate area. First of all, let me say that I think fundamentally, despite all the problems and they’re real problems, corporate America is performing pretty well when it comes to the economy. Productivity is up, earnings are up, their products are still leading products across the world, so the basic structure, when you get down to what corporations are doing, what they’re producing, what the work force is doing. You know, it’s performing pretty darn well, despite all of our problems. So, clearly, all is not well. I see change has occurred in the last 10 years, 15 years in corporate America, and I think a lot of the abuses we’re seeing, and a lot of the corrective

actions that are being taken really address themselves to the fact that the change in corporate America to what I call the “Democratization of Stock Ownership.” There is a much broader interest in the fortunes and the share price, and the fortunes of corporations than there was in the past. The public is much more engaged because of 401Ks, because of the investments, because of mutual funds, their savings, their retirement. It’s not just a matter of working for a company a long time, being taken care of when you retire. Everybody’s an investor, everybody is day trading or following the stock market, worried about their taxes. I mean, across the board, middle class, right on up. So there is a new public involvement and concern, and I think this has driven both a lot of the reforms and has also spread the pain of these corporate failures to where corporations are going to have to change from what I would call, what used to be a very clubby type of participants in a corporate world, from directors to management. You have the situation with Grasso and see that clubbiness, and how did this get out of control, and people scratching one another’s backs. You’ve got the situation with the Tyco attorney now, the General Counsel, where his compensation was tied to the CEO’s, certain ratio, so where’s the independence there that he can exercise for the company. And quite frankly, you had the nomination of Harvey Pitt to lead the U. S. Securities and Exchange Commission (SEC) with all the accountancy problems, and where he was in terms of some inherent conflicts, and what he had done, who his clients were. Even as good as the Delaware Chancery Court has been, and this is a fundamental change and one I think this society should look at because I think it’s a real sea change. Corporate law, corporate governance, was a matter of state law and that state law usually came down to the Delaware Chancery Court. So, basically the corporate law in America was being set by the Delaware Chancery Court. It was a good court. They had well-schooled and talented people on that court. But this was a fairly closed culture, until this has exploded and the investment base has broadened so much. So, what is happening, you’ll hear more about this, the efforts, if you look at most of Sarbanes and Oxley and the efforts of Sarbanes and Oxley, a lot of it is geared to breaking down the “conflicts of interest”, to breaking down the clubbiness, to make sure that they’re independent directors, to making sure that auditors are truly independent and they’re governed in terms of separating out how many roles they can play in the standards that would govern their playing additional roles other that auditing within a corporation. The role of shareholders is being expanded; they’re getting more voice in corporate affairs, and the whole issues of compensation are being addressed. For instance, one of the things being kicked around now, is how do the General Counsel, the controller and internal auditor get compensated? Should their compensation be more flat fee with some incentive maybe even after they leave in terms of when they could exercise stocks, but to

divorce their compensation from the day-to-day successes, or quarterly successes, of the company; that’s being looked at, hasn’t happened yet. And the big issue that I think that again, is worthy of this groups consideration over time, is again, the change from basically a state dominated law on corporations, corporate responsibilities and what’s becoming really a federal law that is replacing much of that state law, and I think is going to be the future and we need to see what the implications of that are. I have two minutes to get down to really what I wanted to talk to you about. Laughter Alright, we get carried away with ourselves. So, let me go to General Counsel and the role of General Counsel. Some of the, I’ve got to say this one thing. Audit, the audit committee, the whole thing is to break down conflicts of interest. So they’ve given the finance and audit committee of a corporation the sole power to hire and to set the salary for the external auditors. Now they’re giving the external auditors the responsibility for auditing the audit committee under 404 in the internal controls of Fox Garden, in-house, whatever, but if you’re going after conflicts - that is not the way to get there. So, regarding the General Counsel, you have several, and we can talk about these later, you have several of the reforms which are going to impact the General Counsel, his relationship to external counsel, the relationship to management of external counsel, the trust between…when a General Counsel can do his job best when he is fully engaged in the strategic considerations of the company and has as complete information as you can have. What’s called the “reporting up” rules are going to put a strain on that particularly as it relates to outside counsel, and I don’t have time to get into what those are, but we can talk about them. Another one that all lawyers should be concerned about, that has not passed yet, and I’m assured is not going to pass is what we call “Noisy Withdrawal”. It is a direct attack on attorney-client privilege and basically it says if your external counsel feels that he hasn’t gotten response that he thinks he should have from a board, General Counsel, or the CEO that basically, he makes a withdrawal which in effect, tells the SEC there’s a problem or actually has to report this, or the CEO has to end up reporting it. And the bar has risen to that occasion and all lawyers should be concerned about that attack on attorney-client privilege. And the last thing, which we can talk about, is the manner in which DOJ is approaching investigations and attorney-client privilege. Their guidelines say that if you do a self-investigation and you want to cooperate for the corporation, they say one of the factors is you’ve got to be prepared to waive the corporation’s attorney-client privilege. They say it’s not mandatory, but believe you me, it is mandatory if you want to engage and get any consideration. And the last development which is really one of the most frightening from a lawyer’s point of view, if you hire an external counsel to do an internal investigation, which many

cases require that, yes the individuals don’t have attorney-client privilege with that lawyer, but, what recent development in Computer Associates the Justice Department took the position, that if that private counsel, engaged by the corporation, was lied to by an employee during the course of the investigation, that employee then was subject to obstruction of justice charges and three of them did plead to that. We can talk about that later. The long-term affect of this, my concern is, it’s going to break down the trust and put up walls between general counsel, external counsel and management. You’re just not going to get the information if they know this is where it’s headed. So I will leave you with that issue to discuss. Applause Jonathan MOLOT: Thank you very much. Scott Harshbarger, prior to joining Murphy, Hesse, Toomey and Lehane, heading up the firm’s governance practice, Scott Harshbarger’s distinguished career in public service included experience as the National President and CEO of Common Cause, Attorney General of Massachusetts, District Attorney of Middlesex County, among other positions of leadership. As president and CEO of Common Cause, Mr. Harshbarger re-energized the nationally recognized independent government and corporate watchdog group. We’re going to push passage of the landmark federal campaign finance reform legislation and expand in Common Cause’s agenda to include election reform and its corporate governance initiative. As a two-term Massachusetts Attorney General from ‘91 to ‘99, Mr. Harshbarger won national recognition for his work on crime prevention, civil rights and hate crimes enforcement, elder protection, and prosecution of white collar crime and public corruption. He was the first Attorney General in the nation to work with the health care community to develop hospital and HMO community benefit guidelines and was one of the nation’s first to sue the tobacco industry to help recover smoking related healthcare costs. Mr. Harsbarger was the Democratic nominee for the governor of Massachusetts in 1998. Before his election as Attorney General, Mr. Harshbarger was the Middlesex County District Attorney eight years, a graduate of Harvard College, and Harvard Law School. Mr. Harshbarger taught legal ethics at Boston University Law School, and was a visiting professor at Harvard Law School and Northeastern Law School. Scott Harshbarger. Applause

Scott HARSHBARGER, Murphy, Hesse, Toomey & Lehane: Jonathan is wisely using a time limit on all of us. We may get to the topics we’re supposed to talk about at some point. By the time we’re done, Mel will be rebutting all of us before he even gets to that. But it’s a great honor to be hear and certainly to succeed somebody who I would not survive this if I didn’t say everything that I achieved I learned from Charles Burson. One of the few Attorneys General in the country who never even got appointed or elected he was anointed, as we used to say, because he was just named by the Supreme Court of Tennessee. But it’s a great honor to be here and I’m pleased to hear some of the issues that Charles is raising. You have a wonderful panel and I congratulate you for taking this issue. I want to make four or five basic points to you but I want to just lead in with three specific things in response here. I think it’s very important for us as lawyers to think about our role here. In most of our life, my life, I’ve been very proud to be a public lawyer. I have always found it to be one of the better ways to blend my professional skills and personal values and make a difference everyday. To some extent my ethical pace was based on my role, that is, in some respects, whether you’re a defense attorney, a legal service attorney or prosecutor, your roles are defined, you have variations and discretions, but they’re there. The private practice of law, its intersection, poses much greater challenges to us as professionals, because it’s not so clear who the client is all the time. It’s clear if you say the client made me do it, but it’s a tension. I spoke about this, if looking for a cite, I did a speech to, a Judge Kaufman lecture in Maine, and talked about what I saw was the challenge in this area to lawyers. Because the interesting piece here for all of us is not the concerns now, because one may ask where the American Bar Association was several years ago when these same challenges were being made to defense attorneys who were representing people who weren’t popular. Now suddenly we’re attacking corporate counsel. Now suddenly major law firms have to face some of these issues. These are some same issues, the usual, public defenders and others have faced for a long time. I don’t say it’s good or bad. I just think it’s high time that the bar talked about this more than in terms of how do we protect traditional interests but what is our goal here. Because, remember this, every piece of paper, every piece of advice, every action that was taken by the major wrongdoers as well as the good folks, not just the evil doers, in corporate America or anywhere else, was reviewed somewhere along the line, over, and over, and over again by a lawyer, particularly in the financial world, particularly in the world of securities law, particularly there. The question becomes, at what point, and what were our obligations, if we truly did not believe that our clients were in fact engaging in misconduct, and if we didn’t believe it,

the question somebody might ask is the same question they’re asking of New York Stock Exchange Board. Either 26 CEOs of America’s leading companies are totally incompetent and had no clue what their role was as a Board of Director of the major stock exchange in America, or they knew exactly what they were doing and they did it consistent with practices, accepted customs and so on. So as we look at these issues, let’s look at the reframing of this for us as professionals. And secondly, I think it’s also a major political issue, as I happen to think that the issue of how we reform and ensure good governance at the corporate level is a very important pro business issue, pro economic issue and something we ought to be addressing and it has yet to be debated, has yet to discussed by either party, by either candidate again this year in 2004. My third introductory point and I will get to my other stuff, Jonathan, is this: In June 2001, Dennis Kozlowski was Business Week’s, “Man of the Year.” All four of the major CFOs on trial right now, were CFO magazine’s “CFO of the year.” We aren’t going to look where the General Counsels were and who were cited in what role and what capacity. But this is not the origins like of anything come over a ten to fifteen year period. But this change in the realities of corporate governance and its impact is a very recent phenomena. Sarbanes Oxley was only passed less than two years ago. It’s only been, we’re going to the second year of the Corporate Fraud Justice Department task force. This is a new world of enforcement and we also need to remember that Eliot Spitzer has not drilled a dry hole yet. Applause And by that I mention it, because just a year ago, I was at a panel of Harvard Law School with a leading member of the mutual fund industry, a leading member of a major New York law firm with Spitzer and Kramer on the panel, and they were all talking about how terrible it was that we had Enron, Tyco, WorldCom, Adelphia. Kramer went on to list 15 other companies, major companies that had restated their earnings and, luckily, the mutual fund industry had avoided all of those problems. Laughter Three months later, the New York Stock Exchange which was giving rules to every corporation in America, turned out, those people live in glass houses shouldn’t throw stones. But they weren’t brought down by AG’s or SEC, it was institutional investors, it was the beginning of this shareholder activism. That’s the framework within which I look at these new realities. Three years ago the cop was asleep on the beat, there was no effective SEC enforcement, there was no effective major presence except from a few attorneys general at the state level, that’s one piece.

Secondly, the media was asleep and totally spun by corporate America. That’s not true today, anymore at all. Today governance is on everybody’s plate. Nobody knows quite what it is but governance is there, it is back as a priority, people trying to think what it’s about. Fourth, the constituency has awakened. Remember, democracy is not a spectator sport, as John Gardner used to say, and neither is today, investing, nor can investments be left to simply the insider interest anymore when 60% of America’s invested in the stock market and we just lost $7.5 trillion in shareholder value. No government action in my lifetime has ever had that affect on the average American and their retirement and security. I also believe that the reforms here have to come from a much broader group than government. This is not going to be solved by law and law enforcement alone. That’s the challenge to our profession. It’s the challenge generally. Because what we had here was a massive ethical breakdown. Money greased the independents. Money and power greased the independents, not only of the CEOs, but boards of directors, CFOs, CEOs, auditors, accountants, and the legal profession. All the ordinary checks and balances simply froze or fell apart. So as Ben Barber has said, this is not necessarily a failure of capitalism, because we want the market to work, it is the engine that is improving the quality of our life, but we want it to perform with some measure of fairness and integrity, at a level playing field and let people have at it. What Ben Barber said, this is not failure of capitalism, it’s a failure of democracy, the checks and balances, accountability, independence, transparency, disclosure -- was not working and has not been working, and to some extent that’s what this is really all about. So I come to you with three messages in the two minutes I have, in the sort of the presentations I try to make, and this is partly, I believe, it may be a way, how you talk about this with the people affected is very tricky. But it’s also hard to talk about others because we haven’t had a range of advocacy here, so let me just give my take on this. I think this is one of the great windows of opportunity we have to truly reform corporate America. The leaders of this charge, believe it or not, it’s not Eliot, it’s not Ralph Nader. The voices to listen to are John Bogle, John Biggs, Arthur Levitt, Paul Volcker, Warren Buffett. Leaders, gurus in the business world, who are shocked and outraged by what they believe to be a total exercise in shame on the part of many corporate executives. They speak much more seriously about this than we do about this. Bill Donaldson’s speeches, Bill McDonough’s speeches are much tougher than anything you’ll hear anyplace else because they talk from a base of saying, I believe in this system, I want it to work, I want it to be fair. I believe it’s the greatest engine, but it’s not fair if people game the system. If we do in corporate America what we’ve tried to excise from public life without penalty, expect to have favoritism, insider dealing, conflict of interest, hire your friends,

have interlocking directorships. We outlawed that with conflict of interest laws. Attorneys General try with non-profits to deal with that, but this is new to corporate America, this sort of structure, but it’s pretty basic and pretty fundamental. Those are the checks and balances. The second piece is, the case here can be made, in my view, two ways for good governance. One is protection. It is one of the ways to avoid risk and harm, is to have good governance and good integrity and there’s lots of ways to that compliance. That’s the way we as lawyers talk about this, rule based ethics and compliance systems. That’s also what causes the problem Charles talks about because that compliance system done by lawyers who inherently are cautious, careful, is always going to stand in the way of that entrepreneur who wants to move forward. Many of us have not learned the art of helping somebody implement a good business strategy in a fair and honest way. Rather then tell them what they can’t do, try to figure out how to help them with integrity, to give alternatives that are good for business as well as doing well by doing good. That’s the challenge and the opportunity because those systems exist. Those best practices are out there in every business section and they’re available to you to use as a way to help reform. The final piece is, I believe there’s a positive case for good business. I think, today you can make doing well by doing good a business competitive edge. I’d like to see businesses talking about their integrity with ads in the Wall Street Journal as a competitive edge, not because the SEC has required them by a settlement agreement, to talk about those systems that are now in place. So there’s many opportunities here, as well as problems, but we cannot ignore the reality as we close, that this is not just about corporate executives, this in not about just that culture. This is a democracy, my friends. Many of us as professionals are part of this culture and a part of this system. We are both the cavalry and we also must look at each other very hard to see what are we doing about it, how do we help move this forward? Because at the end of the day, at the end of the day, millions of people in this country lost their financial security, lost their jobs, their employment. Many competitors, imagine if you were a competitor trying to compete with WorldCom. They were making it up and yet it wasn’t a fair and level playing field. So many fundamental values are at stake here and I think we have a real opportunity to do that. I happen to believe the mechanisms are beginning to be in place. I happen to believe that shareholders, institutional investors, and litigation helps external pressure to empower people inside. The challenge is to General Counsels, compliance officers, and lawyers, to use that the way that good advocates do to pressure and push people inside to do the right thing and people inside get to do the right thing because they say if we don’t do it somebody outside will make us do it, which is better. Thank you. Applause

Jonathan MOLOT: Okay, so, so far, we’ve got Scott Harshbarger who’s going to get Charles Burson to do the right thing, and then we’re going to have Professor Kimberly Krawiec saying, ‘even if he does do the right thing, is it really going to make a difference?’ Professor Krawiec is a professor of law at the University of North Carolina and was the Bruce W. Nichols Visiting Professor of Law at the Harvard Law School this past academic year. She teaches courses in corporate securities and derivatives law and has published many articles on a variety of topics related to securities and derivatives regulation with an emphasis on insider trading, rogue trading, and organizational misconduct. Professor Krawiec was the 1999-2000 recipient of the Robert Childers Award for Teaching Excellence at Northwestern University School of Law and the 1999 recipient of the Corporate Practice Commentators Best Corporate and Securities Law Article. In addition to her academic pursuits, Professor Krawiec has been a commentator for the Central and East European Law Initiative of the American Bar Association since 1997 and, in that capacity, has commented on draft securities laws for the republics of Bulgaria and Ukraine. She’s also on the faculty of the National Associations of Securities Dealer Institute for Professional Development at the Wharton School of Business. Professor Krawiec. Applause Kimberly KRAWIEC, Professor of Law, University of North Carolina: Just give me one second, like most academics I’m so wed to PowerPoint these days that I can’t even contemplate working without it. Okay, what I’m going to talk to you about today is a topic that has certainly been in the limelight post-Enron, and that is corporate internal compliance. By internal compliance I mean things such as ethics and conduct codes, training programs, monitoring and auditing systems, whistle-blowing procedures, all of the things we as lawyers often play a role in setting up for our clients. And because past experience has taught me that my conclusion is unpopular, especially among groups of lawyers, I will go ahead and cut to the chase. And that conclusion is that, if the goal of the U.S. legal system is actually to reduce corporate misconduct as opposed to providing income for lawyers and consultants, then our extreme reliance on internal compliance as a liability mitigator is a mistake. I’m going to tell you why that is today. First, just a brief introduction, even though I know this is an audience of lawyers, most of us are so specialized in our practice that even many lawyers are not aware of the true

extent to which companies receive a liability break for the presence of internal compliance. Most people are familiar with the organizational sentencing guidelines, which for all practical purposes require companies to have certain internal compliance structures in place. But you may not be aware that that approach has been mimicked across a variety of legal regimes including agency guidelines, the enforcement decisions that the Justice Department and by state Attorney General, that internal compliance plays a major role is civil punitive damages, in state criminal liability decisions, that it plays a major role in corporate and securities laws and I’m sure that many of you are aware that perhaps one of the most important roles of internal compliance is an Equal Employment Opportunity (EEO) law, Title VII litigation. Now, all of this begs the question, of course, of whether or not internal compliance is actually effective at reducing organizational misconduct, which presumably is the goal of requiring all of these things to begin with. The truth is that there has actually been very limited empirical study of the effectiveness of internal compliance structures in reducing organizational misconduct. An omission that in and of itself is disturbing, given how important they are in our current legal regime. Now having said that, I have over the years, been compiling, and reviewing, and analyzing empirical studies on basically four categories of internal compliance structures. Those are ethics codes, the Office of the Solicitor General (OSG) recommendations, which of course includes ethics codes as one portion of its recommendation, diversity training and EEO compliance, which also includes diversity training. Now in the interest of saving time, I’m going to not really discuss the ethics code studies, which there are dozens of them. The reason I’m not going to focus on them is because they almost universally have very poor methodology for reasons that we could discuss during Q&A if you’d like. But, suffice it to say that the studies that are more independent and that have better methodology tend to not show a connection between ethics codes and levels of organizational misconduct. Instead I’m going to skip directly to the OSG studies. There have actually only been three studies that seek to systematically test the assumptions of the organizational sentencing guidelines. None of those three studies found any support for the hypothesis that the type of internal compliance structures recommended by the OSG actually reduce organizational misconduct. In fact, two of the studies, the McKinnell 2002 study and the Matthews study, found unanticipated positive correlations between certain types of misconduct and the presence of internal compliance structures, leading the authors of those studies to conclude that many corporations might be using internal compliance structures primarily as a window dressing mechanism to avoid liability for misconduct that they were actually aware of within the organization. The next big category is diversity training. I’m sure most of you in this room are familiar with diversity training and perhaps have sat through it. Katerina Bezrukova and Karen

Ginn of the Wharton School in a 2001 working paper, reviewed 20 empirical studies in management, psychology, and sociology journals. Many of these studies did in fact find an improved awareness of diversity issues. In other words, I am more aware after diversity training than I was before diversity training, of the types of issues that might arise in a diverse work force. However, only one of the studies found a sustained attitudinal or behavioral change. It found an attitudinal change, it actually did not test for a behavioral change. Sustained, by the way, is defined as eight weeks, which was the entire time frame of the study. So we’re unable to say that after an eight-week period, what impact, if any, the training had, and again, this was only one of twenty studies. EEO Compliance, the most recent, and I think best and most extensive study on EEO Compliance is by the Harvard Sociologist Frank Dobbin, and in fact it’s so recent that this is still a working draft. Dobbin looks at a range of EEO Compliant structures, diversity training, the presence of an EEO policy, a mentoring program, an EEO office, pretty much every major EEO compliant structure that you can think of. His database is all employers who report to the EEOC and he compares the presence of EEO compliant structures to the growth rate of women and minorities in management positions, both before and after the introduction of these various types of EEO compliance mechanisms. He does find differences across the type of employer, but essentially for employers that are not federal contractors, he finds that most of these types of internal compliant structures do not have a significant positive impact on the growth rate of women and minorities in management positions, and some of them, in fact have a negative impact. He also found differences by the type of structures, so for example, there may be different findings for diversity training than there are for a mentoring program and across demographic group. One of his most striking findings though, was the negative effect for black men in most non-federal contractor employers. So that brings us, I think to the final question, which then is why. Why do we have a legal system that is so insistent on rewarding companies for implementing these types of mechanisms despite any real evidence that they do work and I think a growing body of evidence that they don’t work. I think this is the point where we have to ask ourselves what groups have in fact pushed for, what I refer to as, this internal compliance safe harbor from liability. Perhaps, not surprisingly, one group that emerges is business organizations, business organizations including the business round table have been very active lobbyists, particularly with regard to organizational sentencing guidelines, to push for this type of internal compliance safe harbor, as I call it.

The less obvious culprit though, is legal compliance professionals including lawyers. I want to make it clear that I’m asserting that this is not a conscious or sort of planned cooperative effort by the profession. Instead it just appears to be a pattern that has in fact emerged. The role and relationship of internal compliance professionals to the growth of internal compliance within the legal system has followed a particular pattern that’s been documented in several different studies. I will discuss one of them in just a minute but that pattern is first of all an overstatement of legal risk and inability to contain that risk. Lawyers are less guilty of this than other legal compliance professionals but we are guilty as well. Businesses appear to be unaware that this phenomenon is taking place because they follow the recommendations and we tend to see a diffusion of whatever has been recommended. As these cases then wind their way through the courts, courts tend to look to industry practice to determine what is sound business practice. Deviations from the norm then result in liability, which reinforces what the legal compliance profession has in fact been saying all along. Now, as I told you, this has been well documented across a variety of studies across a number of years, probably a decade at least. I’m just going to discuss one with you because it relates to internal compliance, and that is the presence of grievance procedures, which was studied by the sociologist Lauren Adleman in 1999. Adleman reviewed articles in personnel management and legal journals from 1964 to 1989. She found that those articles tended to make two strong claims. The first was that internal grievance procedures reduced the number of external complaints. The second one was that when complaints nonetheless, did find their way into court, those organizations that had internal grievance procedures would be rewarded by the court. As it turned out both of these claims were entirely false. Internal grievance procedures had absolutely no impact on the number of external complaints, and in addition, had absolutely no impact on liability once those complaints found their way into court. In fact, only 13 courts during the entire time frame of the study even mentioned internal grievance procedures and only six of them indicated some willingness to consider it as a defense. Nonetheless, businesses appeared to be unaware that this legal advice was not exactly correct because the presence of internal grievance procedures within organizations diffused exponentially throughout the time frame of the study. Finally these claims gained content, of course, as most of you know, with the Supreme Court rulings adopting internal grievance procedures as a formative defense following the pattern that had been established through several other studies. In conclusion, what are we supposed to take from all of this? First of all, my conclusion is not that internal compliance is necessarily bad, that all companies should necessarily abandon it. Every company is different. The compliance needs of every company is different. However, what I am saying is that internal compliance should really play no role in liability determinations and the reason for that is that legal decision makers,

courts, agencies, prosecutors simply lack sufficient evidence to determine when internal compliance is genuine and, therefore, genuinely designed to deter misconduct and is cosmetic, is there just to reduce liability. But, having said that, my prediction is that the legal regime is unlikely to change because power political forces, including some of us in this room, have a stake in keeping it the way it is and my prediction is that’s the way it will stay. Applause Jonathan MOLOT: Well it’s a sign of how corporate law has changed in these scandals, you can sort of see sparks starting to fly. I see ways they can actually work it all out. Our next speaker will be Melvin Weiss. . . Melvyn WEISS, Milberg Weiss Bershad & Schulman: Can we pass on the introduction. Jonathan MOLOT: Sure that will be fine Melvyn WEISS: We’ll save time. Jonathan MOLOT: Who needs no introduction. (Laughter) Melvyn WEISS: That was fabulous. You know I’ve never really heard it put that way and it sort of feeds right into what I have to say. Greed is a growth industry and it always will be. I said that maybe 30 years ago. People need deterrents to act properly in the corporate world. We’re not dealing with a body of boy and girl scouts. This is a highly competitive world. There are huge amounts of money that are at stake and there’s a lot of self-interest, there always has been. It’s not a surprise that we’ve had this tremendous blow-up in corporate governance in the last ten years. In any event, I have written an article recently that was published in the Harvard Journal on Legislation giving my views on what led to this break-up and I’ll try to give it a broad brush very quickly.

Nobody has mentioned the investment banking community as one of the culprits here. It’s very interesting to me. You mentioned accountants, lawyers, Boards, but the investment banking community has been invested with a great and important role in keeping investors protected. You’ve heard the term due diligence. They’re supposed to perform due diligence when they bring companies public, when they do recommendations to customers to buy or sell securities. I mean this is something that we’ve always treasured as an important fiduciary role when you’re managing other people’s monies like banks do and investment banks do. Our society expects special conduct from you. Now when you go back and look historically at how corporate managers have been compensated, you will see that, in the beginning, the ones who made the mega wealth were the entrepreneurs, the ones who were the inventors, the Henry Fords. It’s because they owned a lot of stock because they started the business or they invented something that made it especially valuable. Then they would turn over the reigns to, what we refer to as professional managers and what are professional managers? They’re temporary watchdogs of other people’s assets. Companies under our system have infinite lives. So if you’re appointed as the CEO or the Board to look after that enterprise, you’re a temporary caretaker of other people’s assets. Well, along came guys like Mike Milken and they taught corporate American how to use mergers and acquisitions to make these temporary caretakers mega rich, just like the entrepreneurs became mega rich, if they succeeded. What they did basically was trade your assets, as temporary watchdogs, away so that they could get special compensation in the form of golden parachutes and the like, you’ve heard all of those terms. They used artificial means to do it. They used junk bonds. This was all going on under the Drexel - Milken reign. Then when that whole use of junk bonds and the mergers and acquisitions (M&A) business fell apart because junk bonds were misstated on the books of virtually every enterprise in America, which was a conspiracy joined into by the accountants, and we almost had a failure of the entire banking system, especially the Savings and Loan (S&L) businesses. Wall Street had to find another way to enrich these temporary watchdogs of other people’s assets so they came up with another magical weapon; and that was stock options. They used stock options as a way to enrich these corporate caretakers and they did it in a very interesting way. They did it by cloaking it, by not expensing it on the financial statements so it was like a free giveaway under the radar of the average investor because it really does dilute the asset. So now you have to make the options worth something and they’re only worth something if the price of the stock goes up. So what you’re doing is you’re feeding the need to create falsehood because there’s just so much growth that companies can truly perform in a normal society.

Well now we engraft upon all of that the advent of the tort reform movement, which really got started in the early ‘80s. One of the most fascinating studies that I’ve seen was just published by the Common Wheel Institute, which is a not-for-profit organization in California not funded by lawyers, and it’s entitled “The Attack on Trial Lawyers and Tort Law.” What happened after the failure of the junk bonds and the almost collapse of the S&L industry because of the complicity of accountants, the accountants started to lobby Congress for tort reform. That’s a great response to wrong-doing that’s engaged in such a widespread way. And it sort of feeds into what you’re saying Professor. That when proposals are made by the wrongdoers, beware, okay. So, they came to Congress and they tried to sell Congress the idea that shareholder’s litigations were out of control. That there was an explosion of litigation that was going to seriously impair the ability of accounting firms to survive, much like you’ll hear from the docs, and what you’ve heard a little bit from our first speaker, that we can’t function well. We’re not going to get information properly unless we give safe harbor for certain type of conduct. Well, the accountants weren’t succeeding very well because we were able to expose a lot of their shortcomings. They were the failures, okay. They forgot that they had a watchdog function and they failed in that watchdog function. So, they went and got the high tech industry to back them because we were suing them a lot as shareholders in Silicon Valley. And if you take a look at that record of corporate failure, it’s just unbelievable how many companies made profit only in their lifetimes during the period just before they went public, and made mega bucks for the insiders, and then the companies failed later on. But that was just a forerunner of the terrible things that happened later and there’s reasons for what happened later. So, what they went to Congress to do, was to breakdown the deterrence that we had built into our system by passing laws that made it more difficult for victims to get remedies. Tort reform doesn’t mean stop torts from happening. Laugher It means stop victims from getting remedies. Sort of perverse isn’t it? In any event, just before that happened, which was 1995, another interesting event occurred in 1993. The Supreme Court of the United States in a case called Central Bank…two minutes? Well I’ll have to cut history short then. Laughter Central Bank, the Supreme Court of the United States after 60 years of contrary jurisprudence came down with a 5-4 decision and said that aiders and abettors of securities wrongs can not be held liable under the federal securities laws that were passed in 1934. Up until that point, every time we brought a lawsuit we named aiders and abettors as Defendants because they should be held liable, just like any other tort. At that point in time we could go into state courts and prosecute aiders and abettors.

Then 1995 comes along and they made the pleading standards much more difficult to bring actions against corporate wrongdoers and we thought they would at least reinstate aiding and abetting as a ground for liability, but they didn’t. Then in 1997 they totally closed the loop by preempting all securities litigation, brought as class actions, into the federal courts. So you can only now sue under federal law in federal courts and you can’t sue an aider and abettor. So, now all of these watchdogs, the accountants, the lawyers, the investment banks, the consultants, even members of the board who weren’t the actual speakers of the alleged wrong, thought, ‘uh, life is much better for us, we are not going to be easy targets for these miserable lawsuits.’ Which really by the way, never increased greatly over the 20 years preceding the enactment of that law, despite the fact that we have three times as many public companies, that capital formation increased from a few billion dollars a year in the early ‘70s to trillions in 1995. You would think that the number of shareholders actions, that backed this idea of explosion, would have increased from the 150 to 200 a year that were being started in the 1970’s. In fact, there were only between 200 and 250. That was the litigation explosion. Congress doesn’t care about empirical studies, they just don’t. I mean all you have to do is see all the record that’s before them before they pass this law and you can see they just ignore it. They just want to do what they want to do. So, the bottom line is, we had a tremendous economic growth. It was a 10-year growth. And products that they wanted to bring to the market started to shrink in terms of quality, because you just have so many great companies that you can bring public, so they had to create illusions about them, and the watchdogs, not only were asleep, but they felt immune from accountability. And the result is, because we did away with deterrents, that we had a total breakdown. Now, who’s to blame? THE LAWYERS! The Plaintiff’s trial bar. We’re the ones to blame. You go into the shuttle and you find magazines like this, “Trial Lawyers Inc.,” “Manhattan Institute,” and you should see what’s in here. Laughter This is a think tank and I found myself one of Motley’s Crew, Ron Motley, there’s my picture, I’ve met him three times in my life. But at least I’m in good company. I have John Edwards as part of Motley’s Crew. I have Joan Claybrook, Ralph Nader, Elizabeth Cabraser, we’re all part of Motley’s crew. This is what we’re up against ladies and gentlemen and if we don’t fight it, we’re dead meat. Make no mistake about it. This report documents what the other side is doing day in and day out with billions of dollars to shut down our access to the courts. If this society that we’re speaking at today has any role to restore integrity to our justice system it’s to fight this. Thank You.

Scott HARSHBARGER: I’m going to be very brief because I’m sure people have questions and we can certainly have opportunities here. The part I think I would stress on this is that whatever you look at, you’ve got to have the checks and balances. This system is no different than, money and power intersect. Greed is a major player. That’s always been part of the capitalist market. It also exists in politics, it exists in every institution, it becomes closed, insular, without outside accountability, and we’ve seen that systematically. So that’s one piece of it. I think that shareholder actions, this kind of litigation, all these things are accurate. You could get really, if I put my Common Cause hat on and we’ll go right back to basic, which is that, if you ask Arthur Levitt what happened, very clear, Wall Street, the accountants, all the powerful interests, simply bought their way out of SEC enforcement, through the campaign finance laws. That’s why Congress acted, that’s the response. So you have a number of forces that are operating here that created this. My own view is, just very quickly is that you need to restore the law in law enforcement, the checks and balances. But at some point, all of us have got to say, the law cannot do this alone. We’ve got to find ways to motivate people and Kim’s studies motivate people to do the right thing. Now some of that has to come through compliance systems. So that what happens here is, I think you have all the reasons to comply to avoid risk, to avoid being sued, to avoid losing your insurance, to avoid having your reputation damaged, to make sure you don’t get prosecuted now by the Feds, to make sure that Mel Weiss can’t get you. All of those reasons sit there. What you see is, they weren’t integrated, and Charles point will be later, it is all about how much they are integrated into the culture. Are the leaders making something of this, diversity training has worked for me when people have bought into it as part of the business mission, as part of our goal in participation. That’s why it works because everybody’s a part of it. That’s the same thing here. The positive side of this to me, Jonathan, is this. I am impressed by the number of CEOs, although very quiet, amazing silence here on the part of so called responsible leaders in the corporate sector, who feel very strongly about this. Almost any good CEO will tell you that all that this did is codify what any good business already does. The reason you want to avoid risk, is that you want to be the first to know if there’s a problem. It attracts Board members, it keeps your workplace healthy, it is a good competitive edge. All these things can become very positive and that’s the market force I am not sure will be achieved, but I think that’s the solution. I think this is where lawyers, lawyers by and large are not only to be cautious but good lawyering, good corporate counseling, is helping people get where they want to be,

helping them articulate their interests. Not simply telling what they can’t do, but helping them do things in an imaginative way and I think that’s what I hope this will push. It may be ideal. We’re always going to need the shareholder. We’re always going to need the SEC. We’re always going to need that hammer or as Elliot Spitzer says, “One good prosecution, one CEO going to jail is worth thousands of compliance officers.” I think that’s very true, there is a deterrent effect here. But that doesn’t get positive conduct achieved. It doesn’t get the positives done in a way that I hope we can get, come out of this with something more positive. Charles BURSON: Yeah, so I’m going to respond to a couple of things. It really, in the end, is up to the culture that’s within the instance, so you can have all the compliance provisions, you can talk about consequences. But it comes down to what kind of people you have. We’re talking about thousands of people in companies. One person acting wrongly can get a company into big trouble. That’s why I have a little issue. There is a real basis for giving credit. Corporation is not an individual. It’s a legal fiction in essence in the way you treat, and the considerations you have, in terms of what has the corporation done, really done, and not just papered it over, to try to ensure the conduct, the good conduct of its people. I think a good argument can be made that a corporation, as that type of entity, is entitled credit for it if it’s really doing it. I will tell you, there is, I would venture to say, a difference in the way these enforcement agencies look at whether a corporation is really doing it today as opposed to perhaps historically on some other…I agree there was a lot of papering over. You can see it in diversity. You can see it in compliance. Get your book out, read it. This is your handbook and that is the end of it. You show that to the SEC. You show that to DOJ. Let me tell you what, that is changing. I think you’ve got to take a look at the effectiveness of this thing as we go on a few years after this. To get to a culture to some extent, you’ve got to have guidelines. You say, well everyone knows what’s doing right and wrong. Let me tell you what, there’s a lot of gray out there and a lot of these programs that we have, compliance programs, diversity programs, etc., really help guide people as to the right conduct. Now, Mel mentioned greed and a lot of money and there is. So one way you can punish them, you can be on the other end of one of his lawsuits, you can be on the other end of a DOJ investigation, or an SEC investigation, or you can build within the company the incentives that reward people for good conduct, that punish them for bad conduct and that are real. I don’t mean criminal conduct. I mean proper ethical conduct and you can build that just as the incentive in the compensation programs within corporations from the top down, you could say, has resulted in a lot of the driving bad conduct. Those can be addressed and are starting to be addressed to drive good conduct so that there are real

consequences. It’s amazing the way, in a corporate culture that drives behavior. I mean, I’m telling you, these folks can turn on a dime if you get your incentive programs lined up properly. The last point I want to make on all of this, because I think it’s really relevant to us and I’m speaking of the General Counsel and I’m talking about counsel representing corporations. There is an unprecedented window and opportunity here despite what I said. I do think there’s a risk as we move to the future. But we’ve got a window now where General Counsel and outside counsel can have more impact on the way corporate behavior develops from this point forward for the next two to three years than I think, perhaps, any time in history. Because of and I use Mel as kind of the archetypical… Melvyn WEISS: I’m happy to play that role Charles BURSON: …and I know he’s happy with it, but you know because of that looming out there, because of the aggressiveness of the regulators. You know, they have to turn to the lawyers now. There are real consequences for the corporation if they don’t get it right. I dare say they are willing to do that. They don’t really like it, ‘you know, lawyers get in the way, they slow down, we want to do business.’ For a period of time now, General Counsel and their outside counsel, I venture to say, have more sway in what the company does in this regard than at any time in recent history. That’s an opportunity for us to get this thing right.