LEGAL AFFAIRS/Online Extra
Defining the Role of Ethics Monitor
Fraud can't be eliminated completely, says former SEC Chairman Richard Breeden. But it can be caught before the damage is done
Richard C. Breeden, a former Securities & Exchange Commission chairman, has largely created the modern role of the court-appointed outside monitor in serious corporate fraud cases. He oversaw the resuscitation and eventual sale of MCI (formerly WorldCom) after a massive fraud and bankruptcy, exercising so much clout that he at times vetoed top managers. At the behest of independent directors, he then investigated Hollinger International (HLR ), the global newspaper publishing giant, and charged that its now-ousted managers were running a "corporate kleptocracy."
These days, Breeden is working as a special monitor for accounting giant KPMG, where a court has given him authority to fire executives if needed, in the wake of a tax-shelter sales scandal that has prompted a restructuring of much of the firm. He's also monitoring Hollinger. He spoke about the roles of monitors and in-house ethics officers with BusinessWeek Chicago Bureau Manager Joseph Weber. Here are edited excerpts:
No one has suggested that outside monitors can eliminate fraud. I'm curious about your view.
You can never set up a system that will prevent all fraud. The goal is to set up a system that catches it sooner, when it's a smaller problem and easier to deal with and doesn't destroy as much franchise value and good will of the company.
What's the difference between an in-house ethics officer and an outside monitor?
You're generally playing the same game, although it is a very different context. The inside ethics officer can't have the direct power that an outside monitor can have in a situation like MCI. There's no internal person, whether they are direct reports to the CEO or not, who's going to have quite that.
Outside monitors [tend to be in] companies that have had a major explosion and that are in deep trouble, often at risk of being indicted and perhaps collapsing. The things that happen in those kinds of companies, where you have a company that's in the most extreme form of distress, are obviously quite different from what happens day in and day out in a big company trying to make sure ethics is a big part of their agenda.
There is no one model of "here's what a monitorship is." It depends on the trouble the company is in. At KPMG, it's a much more limited role. There you have a specific agreement with the Justice Department, and I'm there to make sure that they do exactly what the written agreement calls for.
That's much more like an umpire's role. They've agreed to touch first, second, and third base on their way to home, and I'm there to make sure that they touch the bag. In WorldCom, on the other hand, it was an unfolding massive fraud.
At KPMG have you been welcomed by the management? Are they cooperating with you freely, if not enthusiastically?
We've had complete cooperation. I can't tell you whether they're enthusiastic or not. Of course, they smile when I'm there.
They have a completely new management team.... They have new leadership in almost all the senior leadership positions. They've had a very substantial change in their board. There's a new team there. And they are working as hard as they can to live, not only to the letter of the Justice Department agreement, but to the spirit of it, as well. I think they recognize the deep trouble that the firm was in.
Some of these [troubled] firms have had ethics officers.
It's not that you have someone who has that title, it's how much empowerment is there in the ethics department. If you have some really junior person who's running your ethics department, that sends a message that ethics is something you've got to do, but it's handled way down the line, and people understand that that ethics officer is not someone who can march into the CEO's office and warn about a serious problem or go to the board if that's necessary.
Other companies have ethics officers who are very senior officers and who rank comparably to the general counsel. It makes a difference when people see how senior is the person, how close they are to the CEO and the board.
Some critics say you've got too much power at KPMG.
Everybody saw what happened at Arthur Andersen. I can't believe anybody thinks that's a better system. What's going on at KPMG is, I think, a much better process in which the Justice Department made a decision that there had been conduct that warranted an indictment, but that they would not bring the indictment if the company was prepared to completely restructure itself and make specific reforms that would make any repetition of that impossible.
KPMG today is a very different firm than it was when the abuses were going on. We've had extraordinarily good cooperation and the firm is well along in the process of putting in place the best possible systems for not just the things relating to the specific agreement, but much more broadly than that. They're working on reshaping the firm from a total quality perspective and putting professionalism back at the top of the firm's priorities.
What are you doing at Hollinger?
That's a monitorship that's a week old, so it's kind of hard for me to make any predictions. Every one of these things is custom-built. There's no production line here. It's a custom-built process.
--