CHICAGO — The class was not faring well. On its accounting exam the average score was 32 percent. The teacher was particularly exasperated that so many students had missed a multiple-choice question on the meaning of retained earnings.
"Don't tell me that you're on the audit committee and can't tell me what retained earnings are," Roman L. Weil, an accounting professor at the University of Chicago Graduate School of Business, said to the class. (Retained earnings are undistributed earnings that have not been paid out to stockholders or transferred to a surplus account.)
These were no first-year MBA students. They were top executives and board members of some of the United States' largest corporations, at a novel post-Enron boot camp.
About 80 officers and directors from organizations including Pfizer, McDonald's, Motorola, Dow Chemical, the New York Stock Exchange and Eastman Kodak sat through three days of oversubscribed lectures to understand how to do their jobs at a time when far more people are watching them than ever before.
Many students came away daunted and frustrated by the overwhelming message in almost every lecture: that the legal landscape is shifting and that the rules are constantly changing.
"We've got so many unknowns; there are no answers," James Boyd, chairman of Arch Coal Inc., lamented on the last day of class. "And the risk has changed. They are going to hold us to a much higher standard."
The program, developed by the Wharton School at the University of Pennsylvania, Stanford Law School and the University of Chicago Graduate School of Business, focused on everything from whether notes should be destroyed after board meetings (the answer: usually, but not always), to who qualifies as a financial expert on a board's audit committee under the strict new legislation approved by Congress. (The class decided that most of them would not qualify but happily determined that Warren E. Buffett would not either.)
"As I look around the room, I'm not sure if this is an executive education program or a support group," said Joseph A. Grundfest, a professor of law at Stanford University who is a former commissioner of the Securities and Exchange Commission and is on the board of Oracle Corp. "I feel your pain."
An introductory class on directors' fiduciary duties and legal liabilities focused on the basic question of whether board members' main responsibility is to shareholders, to all stakeholders or to the chief executive. "To whom do you owe the duty?" asked Richard A. Epstein, a law professor at the University of Chicago. (The class was divided on the answer.)
He told the class to always think about the answer this way: "Who can sue whom for what?"
"The board is like an insurance policy," Epstein said. "When things are good, you take your money and go to the beach. When there's a crisis, you're working overtime and massively underpaid."
With executives now constantly in the firing line, in front of judges and Congress, another class explored how to prepare for a deposition.
"You don't want to volunteer anything," Epstein said. "You have to have a personality vasectomy." Grundfest added: "Think slowly. Don't pull a Bill Clinton and ask what the definition of 'is' is."
Henry J. McKinnell Jr., chairman and chief executive of Pfizer, told the class at lunch that at a deposition recently he was asked whether the board minutes, which were purposely kept vague, were accurate. "I had to tell them the truth," he said. "I said, 'No, the minutes are not a complete reflection of what went on there.' Our lawyer was going crazy."
At one point, the conversation turned to how to pick an outside lawyer. "The real risk is that if you hire a criminal lawyer, you look guilty," Grundfest said. "If I tell you which doctor I hired, you know what I have."
Most of the lectures were about why it is so important to avoid a lawsuit in the first place. Of Arthur Andersen, Grundfest said: "As soon as it was indicted, it lost. They were de facto dead."
Board members were advised to create clear corporate governance policies and always to make decisions collectively to avoid serious liability. "If you want to get in real trouble, make a decision by yourself," Epstein said. "This kind of misery loves company."
And the professors stressed over and over again the need to tell the truth.
"If there are ways people in this room go to jail, it's probably through crimes of upholstery — the cover-up will kill you," Grundfest told the class. He brought up the investigation of Martha Stewart for insider trading. "She might go to jail because she lied, even though she might not have committed insider trading."