Are Corporate Directors Next Against the Wall?

That 10 former directors of Worldcom, now MCI (Nasdaq: MCIP) -- one of the largest corporate bankruptcies and frauds in modern history -- have settled cases against them by agreeing to pay $18 million out of their own pockets to settle a class-action lawsuit is a world-turning moment.

In the past, directors have depended on the existence of director and officer insurance in instances where lawsuits have targeted them personally. And once again the D&O insurers are opening up their pocketbooks, covering the remainder of the $54 million settlement on this case. But clearly this a chilling development for directors of companies around the country, right?

Yeah, if you happen to be a see-no-evil director for a company in poor financial shape, with a CEO who tends to do things like take massive interest-free personal loans from the company, then those $50,000 per year director stipends may just look a little less attractive. But on the other hand, directors are supposed to be advocates for the shareholders. Now that the WorldCom directors have ponied up 20% of their aggregate net worth, it will be interesting to see whether other directors start taking their roles a bit more seriously, out of, if nothing else, potential personal risk.

Now that this precedent has been set. I predict that over the next few weeks and months, you might be able to use the resignation or early retirement of directors as a pretty good screen to find companies with financial problems hidden in the footnotes, or ethical problems ensconced in the executive suites.

For directors in general, though, what's the big deal? The thing about the MCI scandal that makes it even slightly different from Enron (not to give those directors a single ounce of an excuse for their own failures) is this: The facts that the MCI directors ignored were so blatant, the case isn't likely to offer much of a model for class action and regulatory cases to come. Still, we now have an event -- and a big one -- that shows what can happen when directors fail to meet even rudimentary standards.

But speaking of rudimentary standards and corporate execs being held responsible, can anyone for a second believe that Walter Forbes, who presided over a decade's worth of fraud at CUC before it merged into Cendant (NYSE: CD) in 1998, managed to get away with the "I didn't see nothin" defense? Here was a guy who was paid millions to manage a company where, as Howard Schilit so beguilingly describes in Financial Shenanigans, the frauds grew more and more brazen in terms of earnings inflation over time, but he had no idea that this stuff was going on? His defense was that he was so involved in strategy that he didn't pay attention to day-to-day operations.

It would be very interesting to see if Mr. Forbes ever made such a claim while he was at the helm of CUC, that he didn't actually know what was going on downstairs, that he was all about "that vision thing." It is chilling that we could be at the point where underlings can be sent up the river and directors can have to pay substantial out-of-pocket fines, but the chief executives, the people who will usually have more to gain from gaming the system than anyone else, can simply say "I didn't know," and get off the hook.

See also:

• "Others" Aren't to Blame
• A Step Closer to Ken Lay?

Bill Mann owns none of the companies mentioned in this article.