Push for CEO Certifications May Spark Sell-Offs

Add executive fear to the potential drivers of corporate restructuring. One possible outgrowth of new federal laws designed to fight corporate fraud may be a stepped-up wave of divestitures to trim the size of public companies whose top executives now are under the gun to report accurate financial results. Under the Sarbanes-Oxley Act that went into effect earlier in 2002, CEOs and CFOs must personally certify the veracity of sales, earnings, assets, and other critical financial data by signing documents registered with the SEC. A problem, say some dealmaking authorities, is that a number of companies are so large or have so many business units in house that they may find it tough to certify the overall results with complete confidence. One key countermeasure, they assert, is to reduce the number of units by sell-offs, spin-offs, or other types of dispositions. Although the viewpoint is far from unanimous, those people expecting more restructurings say that placing the executives in personal legal peril could be a primary catalyst to shedding businesses that already may be considered expendable. Threat of legal action scares CEOs Richard Trottier, head of Sundial Partners, a Melbourne, Fla.-based m&a intermediary that has assisted in a long list of corporate divestitures, says that the threat of legal action by both government regulators and investors is chilling to many CEOs. “If I were the CEO, I would want to have fewer businesses under management so I could get a better handle on the results,” he says. Veteran integration and strategy consultant Jack Prouty sees more restructuring because even the best and most honest top managers could be running companies whose underlings were playing games with numbers and performance. With the new law, the CEO and CFO “are putting their heads in the noose.” “The fact of the matter is that someone in the company could be doing something to create liabilities for the business or for me, and I might not be aware of it,” says Prouty, who heads Annapolis, Md.-based Turn/Style Management. “It could potentially be covered up. If I were a CEO or CFO of a good company, and I now have to certify results, I would be scared to death about what’s going on in any business I don’t know about.” However, Michael Wathen, a transaction services partner at PricewaterhouseCoopers, says that the new certification issue is well “down the list” of reasons for restructuring compared with more strategic and value-oriented matters. Certifying the figures, he says, is more a matter of having the right policies and procedures inplace, making sure that employees “have ready access” to them and that they are “well understood,” and having controls to “determine whether they are being followed.” Russell Warren, president of The TransAction Group, a Cleveland-based intermediary, also thinks that strategy and value remain the strongest players in restructuring, noting, “If there’s a stock price penalty for not having corporate clarity, I think it would be a more powerful driver for restructuring.” Warren, a CPA, says that the certification requirement has to be dealt with aggressively inside the company. “If I were a CEO with 20 reporting divisions, I would have a controller or someone else responsible for each one. The first thing I would do when I got the (SEC) form would be to run over to the copying machine and run off 20 copies. Each of those suckers would sign one or it would be their jobs.” Wake-up call for order and simplicity Mark N. Clemente, who has worked on numerous integration, marketing, and strategic assignments, believes that the certification matter can’t be fully divorced from basic strategy and value considerations. But he says that the new requirement may be a wake-up call for top execs to get moving in pursuit of “organizational order and strategic simplicity.” “I think you will see some restructurings once the CEO is asked to put his or her John Hancock on the bottom line,” says Clemente, who heads Clemente Communications Group based in Glen Rock, N.J. “He or she may take a step back and say, Wait a second, I’m not sure of the intricacies of the businesses we got into. If I don’t understand them, how are my stakeholders going to understand them?’ I think we are going to see an impact on restructuring when the CEO says, We’re just too complex.'” Clemente also believes that kind of consideration may impact acquisition decisions. “If I have a deal opportunity, I want to make sure that business is going to add to that organizational order,” he says. “Is it going to muddy the waters or is it going to bring greater clarity to where we are going from an organizational standpoint?” Prouty also advises companies with lots of business units to launch a “business risk assessment on each one, including a check for potential fraud. “The risks were there all along, but now the stakes are higher,” he notes. “Before some middle-management type could be the fall guy. In this new environment, the CEO and CFO are going to be held accountable, and they could be totally innocent.”