The first thing they teach you on the first day of class in Corporations is how to understand the basic structure of your typical corporation.
The shareholders are like "the people" - the voters in an electorate.
The board of directors is similar to the legislature, responsible for promulgating rules for the company and overseeing compliance with them. And
the officers (people like the CEO, CFO, etc.) are akin to the executive, in charge of day-to-day operations.
In practice, however, the shareholder-voters tend to get little say (especially individual shareholders), and, more crucially, the board seldom performs its oversight duties with the kind of scrupulousness the shareholders (and the public) have a right to expect. Most board members have a cozy relationship with the company's management, if they aren't officers themselves. Ever-present conflicts of interest regularly lead to serious directorial negligence, as we've seen over and over again in scandals from Enron on down.
So what happens when the shareholders sue the directors for their malfeasance? If the plaintiffs are successful at all, then typically there will be a settlement. And the money for the settlement usually comes from either the company's own coffers or their insurers. This essentially means that the directors get off scott free - they don't have to pay a dime for their wrongdoing. Gretchen Morgenson, a business columnist for the New York Times and not exactly a hothead, called this "insane."
But that all changed a couple of weeks ago, when New York State Comptroller Alan Hevesi reached an almost unprecedented settlement with the directors of WorldCom, holding them personally accountable for not stopping the accounting fraud that the company's managers perpetrated on their watch. That's right - ten former directors (including the immediate past Dean of my law school, Judy Areen) will pay $18 million of their own money as part of the settlement.
Why should we be concerned about this? Well, for one, it sets a strong precedent - directors of other companies are now on notice that they may be held personally accountable. (As I mentioned above, the corporate world has almost never seen a settlement as serious as this one.) Corporate malfeasance hurts not only shareholders, but workers, communities and, if it's damaging enough, even the broader economy.
But in this particular case, the shareholders truly are "the people" - the case was brought by Hevesi because he is the steward of New York's mammoth pension fund, a fund in which many ordinary New Yorkers have entrusted a good portion of their retirement savings. (Myself included - I have a bit of cash in that system due to a brief stint working in state government.) This settlement is a victory for all of these people, whom WorldCom's former directors happily once rode roughshod over.
So three cheers for Alan Hevesi. Hevesi and his fellow New Yorker Eliot Spitzer are putting corporate America on notice that if it doesn't perform its legally required duties, there will be serious reprecussions.