For CFOs, Riskier Business

Are you thinking defensively? Consider these five worries triggered by the post-Enron environment, and find out how some finance executives are dealing with them.

3. D&O Is Harder To Get

With each financial restatement now considered a potential crime, directors’ and officers’ liability insurance carriers have a new way to wriggle out of coverage. That’s because “every D&O policy contains an exclusion for criminal acts,” says Gordon Davenport, a partner at Foley & Lardner. Even if the feds back away, a shareholder’s civil suit alleging improper certification of a financial report could leave the CFO and CEO vulnerable to losing coverage of their legal defense costs and liability, he says. And without a severability clause, this could trigger other officers and directors losing coverage, as well.

Financial restatements are already being excluded from coverage by at least one major carrier, National Union Fire Insurance Co., an American International Group member company. “There are companies whose financials are very difficult to understand, and the insurance market is not making insurance available to them at prices or quantities they feel they can afford,” says National Union COO Greg Flood, noting that premiums are up an average 175 percent, and up to 400 percent in industries like telecom. “This is one of the few ways we can imagine to take risk on those types of companies.”

As former Sunbeam Corp. CEO Albert Dunlap and former CFO Russell Kersh discovered this year, executives sometimes have to pay out of their own pockets. Dunlap agreed to pay $15 million and Kersh $250,000 to Sunbeam shareholders, even though their D&O carriers agreed to pay them about $15 million. “Unfortunately, it is becoming more common for individual officers to have to contribute,” says Davenport, “and with this new law, I think it may become even more common.”

4. Job-Hopping Is Dicier

Getting the inside scoop on a new job opportunity, never an easy process, has become a lot tougher now that people suspect the information from analysts and in financial reports may not be trustworthy.

Extra homework by candidates, including interviews with internal sources from junior finance staff to heads of key operating units, is prolonging CFO searches by up to three weeks, says executive recruiter Richard Dowd of Dowd Associates. Of the candidates his firm is talking to right now, he observes, “I don’t want to say they’re scared, but they don’t want to get it wrong. It’s a learning experience. Everyone says, ‘I should have done this 10 years ago.’”

5. Guilt By Association

If you’ve had to explain to the neighbors lately that you don’t capitalize expenses the same way Scott Sullivan did, well, that might seem like the limit. But now, with CFOs singled out by the Sarbanes-Oxley Act to sign ethics codes, you might start taking this personally. Don’t. “I think it’s reflective of the publicity given to misconduct by people in finance and accounting–that’s where the scandals have been,” says attorney David Cifrino of McDermott, Will & Emery.

How to shake the stigma? Stay close to those you believe in. “Times like these,” notes Tickets.com CFO Eric Bauer, “make having trust and confidence in the people around you even more important.”

Career Perils

What would be the scariest outcome if your company were next to fail because of accounting fraud?

  • Going to jail
  • Losing your life savings
  • Losing your family’s trust
  • Getting fired and carrying the stigma

Cast your vote

In light of the heightened CFO liabilities, what steps have you taken to protect your personal assets?

  • Increased D&O insurance limits or broadened policy
  • Transferred assets to spouse or relative, or found other “shelter” for them
  • Rewritten or demanded employee contract
  • All of the above
  • None. I don’t believe I face any increased exposure

Cast your vote

Which of the following events represents the biggest threat to a CFO’s job?

  • A restatement
  • An earnings warning
  • A shareholder’s lawsuit
  • A massive layoff
  • A corporate restructuring

Cast your vote

Discuss

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