On Tuesday (and after some seven years!), the SEC finally reached a settlement with Dennis Kozlowski and Mark Swartz, the former CEO and CFO of Tyco.  Among other things, the settlement permanently bans both Kozlowski and Swartz from being an officer or director of a public company.  Given that both are currently serving jail sentences for grand larceny, conspiracy, securities fraud and falsifying business records—i.e., looting their company—one would think that their reputations are so tarnished that such a ban would hardly be necessary.  In other words, is it really the case that either could serve as director or officer of a company after their stint in jail?

On the one hand, at least one study on reputational effects of financial fraud  demonstrates that when directors serve on firms facing shareholder lawsuits alleging financial fraud, those directors experience significant decline in other directorships, and that such decline is greater for more severe allegations of fraud or when directors are in positions with greater responsibility.  This suggests that the reputational impact of Kozlowski and Swartz’s convictions and sentences should result in them not being welcomed in board rooms or executive suites, particularly because of the apparent severity of their crime and their involvement in the misdeeds. 

On the other hand, that same study concluded that whether directors lose board seats also depended upon the governance structures of corporations, and thus that directors were less likely to experience declines in their board seats at companies with weak governance structures.  In other words, some companies may be willing to have people serve on their boards or in their executive suites even if they are tainted by fraud allegations.  To be sure, a fraud allegation is far different from situations where someone has actually been convicted of fraud, and thus perhaps a conviction will have a greater reputational impact even in the context of entities with weak governance structures. 

Of course, at first glance it could seem that this issue is moot.  After all, both Kozlowski and Swartz were sentenced to up to 25 years in prison.  If they serve their maximum sentence, Kozlowski, who was sentenced at 58, would not get out of jail until he was about 83, while Swartz, sentenced at 45, would not get out of jail until he was about 70.  In either case, neither one of them would likely be re-entering the business arena.  Of course, legal experts do not anticipate that either Tyco executive will serve his maximum sentence.  Instead, legal experts anticipated that both Kozlowski and Swartz would be eligible for parole in six years and eleven months after their conviction, and such experts predicted that neither would serve more than ten years.  If these predictions are correct, Kozlowski may get out when he is about 65, while Swartz could get out when he is about 52.  That certainly leaves time for them to re-enter the business world.  Hence, while I initially thought that the SEC ban may have been more symbolic than anything else, it not only is possible that the ban could have some real impact on both executives, but it also is possible that the ban takes over where reputational sanctions leave off.

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