James R. Kelly, CEO of New York-based signage company The Sign Company, is taking a sanguine approach to the spillover effects of the Wall Street meltdown: "Now we are busy changing the names of banks." Kelly and his charming wife Susan offer another antidote to these troubled times--their lakeside B&B in the Western Catskills' hamlet of Halcottsville. New York-area corporate leaders, I promise you, Susan's Pleasant Pheasant, housed in an 1810 sawmill, is the place to straighten out your head and your soul for the hard times ahead. Get your management team out in kayaks on the property's lake and in front of the fire pit immediately--clarity of mind and purpose awaits.

Yet more executive tomfoolery surfaced last week, with the filing of SEC and federal charges against the former CEO and CFO of New York's biggest retail pharmacy chain, Duane Reade, for conspiracy and securites fraud in mispresenting the company's financial performance.

Federal prosecutors allege that Anthony Cuti and William Tennant exaggerated the company's performance to meet their own financial projections and securities analysts' expectations. In a separate complaint, the SEC alleges that the men conspired to overstate the chain's pretax income by a total of approximately $17.5 million between 2000 and 2004, entering into fraudulent transactions to boost reported income and to meet earnings guidance.

Which brings us back to the "accountability through executive compensation" provision of the Troubled Assets Relief Program, and the imposition of "claw-back" requirements to recover compensation previously paid to executives based on materially inaccurate financial statements.

As Foley & Lardner LLP lawyer Steve Barth reminds, TARP is only a blueprint for more explicit guidance ahead, and there remain many questions on the unresolved question of how to properly link compensation and incentive programs with performance. "Should it center on building the financial strength of the corporate balance sheet?" he asks. "On strengthening the equity price? The Act has yet to prescribe real standards for corporate compensation governance."

The Rx is shaping up like this--the days of pay for failure or pay for twisting reality to meet those quarterly earnings are surely numbered.

Jeff Heilman

10/13/08