Corporate Governance and the Trial of Joe Nacchio

With the jury selected in a quick day and a half, the trial of former Qwest CEO Joe Nacchio got underway with vigor. Mostly we heard from Leo Wolfe, the former head of Investor Relations. For the purposes of the main page of the Blog, the most interesting part of the testimony was about the apparent control exercised by Joe Nacchio, the CEO of Qwest, over the disclosure process.

Wolfe reported to the CFO but testified that he took most of his direction, “probably 90%” from Nacchio. It was, he said, Nacchio who laid down the “Golden Rule:” never to do “anything to make the stock price go down.”

In connection with guidance disclosed by Qwest, some analysts and investors wanted to know about the amount of non-recurring revenue booked by the Company. Non-recurring revenue has been referred to through out the trial as “one-timers” and apparently involved "IRUs" (described as “the right to use a slice of the Qwest network for 20 years”) and equipment sales. Wolfe indicated that it was Nacchio who prohibited the disclosure that a portion of the revenue came from one timers. For the top executives, this was “commonly understood.” For other Qwest officials, Wolfe would remind them before meetings with analyst or investors “that we did not engage in any conversation about the one time transactions.”

This Blog does not express an opinion on whether the failure to disclose the quantity of non-recurring revenue at an earlier date was improper. Nor, based upon the testimony to date, is it clear what role, if any, was played by the board or outside accountants in the process.

Nonetheless, in a post-SOX era, it is highly unlikely that an important disclosure matter would be determined by a single individual. Mandatory certification by both the CFO and CEO of the financial statements, the beefed up requirement of internal controls, the increasingly widespread use of corporate disclosure committees, audit committees with greater independence and more direct oversight of the outside accountants, the requirement in Section 404 for accountant attestation of management’s assessment of internal controls, all make it much harder for a single person within a public company to control the information flow to the public.

We will be watching carefully as the trial progresses for any insight into the role of the board in the oversight of the disclosure process.  For more on the trial, see the link to the left of this page.  We will be posting some primary materials later in the day.

Comments

[Herrick Lidstone]

I very much enjoy your posts, both on and off the Nacchio trial. One thing to remember, however, is that to the extent that the IRUs, the "one-timers" were material to Qwest (which the government is working hard to establish), disclosure was required before SOX, and failure to disclose was actionable. Witness the Caterpillar case and many other cases on point. It will be interesting to see what the auditors (Arthur Andersen) say, and whether their recommendations for disclosure may have been tempered by conflicts of interest -- business consulting arrangements like they were for Enron and others.