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A new type of corporate executive is on the rise, spurred by a mix of new laws, litigation fears and marketing strategies. The executive is the chief governance officer, or CGO, typically a legally trained executive who oversees a company’s corporate governance issues and acts as a liaison with the board and the investing community. Although CGOs currently number only about 60, their ranks are expected to grow exponentially over the next year or so, according to David W. Smith, president of the New York-based American Society of Corporate Secretaries. In recent months, CGOs have been appointed at companies as disparate as conglomerate Tyco International Ltd., media giant Walt Disney Co. and doughnut maker Krispy Kreme Doughnuts Inc. Law firms are catching on too, and a growing number are establishing distinct corporate governance groups. That is quite a shift considering that a year ago, the number of chief governance officers could be counted on one hand. Initially, few companies saw an advantage in hiring a top-level executive to handle corporate governance issues. Boards of directors snapped to attention, however, when accounting irregularities first uncovered at the energy trading firm Enron Corp. touched off a wave of scandals among some of the nation’s largest companies. Congress quickly responded with the Sarbanes-Oxley Act, the most sweeping set of revisions to securities laws in decades; the Securities and Exchange Commission doubled enforcement efforts; and plaintiffs lawyers began flooding the courts with lawsuits. Corporate governance became the next big thing. “For years when I would mention corporate governance, people’s eyes would glaze over,” said Steven Poss, co-chair of the M&A/corporate governance practice at Goodwin Procter in Boston. “Now everyone wants to talk to me.” Corporations who opt for a chief governance officer generally fall into two categories. There are companies that hire a CGO to offset the bad publicity generated by a scandal, such as Tyco and software firm Computer Associates, both of which are under federal scrutiny for questionable governance practices, and Disney, whose board has been faulted for cronyism and lack of independence. Computer Associates, whose accounting practices are being investigated by the SEC and the Department of Justice, fought back with an aggressive good-governance campaign, including the appointment of Robert Lamm as the new CGO. “Through our CEO [Sanjay Kumar], Computer Associates has made a commitment to become the ‘gold standard’ in corporate governance,” said Lamm, who joined the company two months ago after 19 years as the corporate secretary of W.R. Grace & Co. and a stint in private practice. Tyco hired its new CGO, Robert J. Ott, as part of a complete governance overhaul after it was rocked by accusations that its top executives conspired to loot the company of hundreds of millions of dollars. Disney, too, recently appointed Marsha Reed as CGO in the wake of heavy criticism for a board largely perceived as a rubber stamp for CEO Michael Eisner’s decisions. Disney has twice topped BusinessWeek‘s list of companies with the worst boards of directors. On the other end of the governance spectrum, some companies have hired CGOs as a way of staying ahead of the curve. Mortgage company Fannie Mae and oil company Sunoco Inc., both of whom have received kudos for good governance in the past, recently added CGOs to their executive rosters. Pharmaceutical company Pfizer Inc. is widely credited with hiring the first chief governance officer in 1992. Then-CEO William Steere developed the position so he could learn more about corporate governance and educate the board, said the current Pfizer CGO Margaret Foran. At the time, she said, it was “very, very unusual.” The current focus on corporate governance has put Pfizer in the spotlight, and Foran said a large part of her job is “missionary work,” or talking to other companies about good governance practices. Foran said she has always done a lot of speaking on the subject but these days, “it’s not quite the hard sell it used to be.” She said the key to her success is a genuine commitment to good governance at the top. “You don’t automatically achieve successful corporate governance by appointing a corporate governance officer,” she said. “It’s a manifestation of commitment, not the other way around.” FULL-TIME JOB For many companies, corporate governance has become a full-time job, Computer Associates’ Lamm said. New laws and regulations, investor relations and even the courts have forced public companies to devote considerable time and money to the issue, and have gotten many of them thinking about whether a CGO makes sense. The first impetus came with Sarbanes-Oxley’s massive overhaul of corporate governance rules last summer. Then the New York Stock Exchange and the NASDAQ both weighed in with their own proposed regulations, many of which went even farther than the federal law. Institutional investors too, smarting from plunging stock prices brought on by corporate scandals, have turned their attention to corporate governance. For instance, Prudential Financials Inc. recently began incorporating into its stock research the corporate governance ratings produced by Institutional Shareholder Services, a Maryland-based investment research firm. Credit-rating agencies Moody’s Investors Service and Standard & Poor’s have also started keeping score on governance issues. “Investors are clear that corporate governance is another risk factor in investing,” said Andrea Esposito, S&P’s managing director for governance services. Even the courts are putting pressure on companies to clean up their act. Delaware Supreme Court Chief Justice Norman Veasey, in an interview with the Harvard Business Review, said that companies should expect the courts to look more closely at governance issues. Indeed, bucking years of kid-glove treatment of company decision-making, the Delaware courts have issued a string of recent decisions scrutinizing corporate governance. The latest, Omnicare Inc. v. NCS Healthcare Inc., 2003 Del. LEXIS 195 (April 4, 2003), invalidated the use of “lock-ups,” a mechanism enabling corporate buyers to receive guaranteed support from majority shareholders of a target company. All told, complying with new laws and regulations, communicating with the investment community, researching best practices and keeping the board informed adds up to enough work to keep not just one executive but 15 staffers busy in, for instance, Pfizer’s case. Still, governance experts say it will be mostly larger companies who take the extra step to hire a CGO. “The mid-caps are already stretched,” Esposito said. LAW FIRMS JUMP ON BOARD The rise of the CGO is not the only outgrowth of the new focus on corporate governance; law firms have also been ratcheting up their governance practices. The passage of Sarbanes-Oxley last summer created a huge and immediate need for governance expertise, and law firms moved quickly to get a piece of the action, cobbling together corporate governance practices from existing corporate, litigation, securities and other practice groups. Tampa-based Holland & Knight was among the early firms leading the charge, announcing the formation of its 30-lawyer national corporate governance group only one day after Sarbanes-Oxley was signed into law. Other law firms, such as Proskauer Rose and Los Angeles’ Loeb & Loeb, soon jumped on the bandwagon. Skeptics dismiss the creation of these groups as a marketing ploy, similar to other national practice groups that have cropped up in recent years, such as new economy practices during the high-tech boom and privacy groups following a spate of lawsuits accusing Internet companies of misusing customer data and federal legislation. Corporate governance lawyers counter that the formation of such practice groups makes sense because the issues that arise under the governance umbrella are typically interrelated. “Our experience is that we provide the best advice when we work in teams,” said Steven Carr, who co-chairs Goodwin Procter’s three-year-old corporate governance practice group with Poss. Long-time good governance fans welcome the trend. “Although it is unfortunate the way it came about, I’m actually pleased that there is so much attention to the subject,” said Pfizer general counsel Jeffrey Kindler. “We’re not interested in being the only company doing it.”

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