Is This America's Top Corporate Crime Fighter?
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 of both.
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 merger.
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 changes."
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."