User:Howard C. Berkowitz/Share

Maximizing shareholder value is Securities and Exchange Commission Commissioner Steven Wallman, in a presentation at Stanford Law School observed "Currently, corporations and their shareholders pay other shareholders and their lawyers very large amounts, both in terms of defense costs and settlement fees, while those responsible for perpetrating serious frauds -- sometimes, yes, even corporate executives -- frequently emerge unscathed unless the Commission itself sues them.

"The costs of these suits are considerable. One study indicates that the average shareholder suit costs $700,000 in legal fees and consumes 1,055 hours of management's time. As for the settlements, according to one estimate, between 1988 and 1993, 343 publicly traded companies paid a total of $2.5 billion in settlements alone [CRS 1995-2] The American Electronics Association estimates that 93 percent of private class action securities fraud suits settle out of court at an average settlement of $8.6 million."

Regulators and legislators are struggling with the balance between frivolous suits that make corporations less competitive, and the legitimate concerns of firms that make overly optimistic forward-looking announcements.

A different, policy-related issue comes with investments in R&D or manufacturing, which may lower the short-term stock price and invite suits. Your system of financial controls should include realistic projections on the return on re-investment. Unfortunately, the business climate is such that it is always well to prepare to be sued.

Another reason for shareholders to sue is loss of revenue and loss of customers. Assume your enterprise sells its product online, meaning that downtime is directly responsible for a loss of revenue. A lengthy period of downtime may cause you to lose customers to competitors with more reliable systems.

Alternatively, assume you are a manufacturing company whose assembly lines cannot function without computer support. During downtime, you are still paying salaries and benefits. You may be able to get downtime credit on leased equipment, but the total cost of downtime far outweighs the equipment cost.

Your financial and strategic planning has to be documented so it demonstrates that, for example, it is following a reinvestment policy approved by the board and possibly the shareholders. In the event of major incidents that impair your ability to deliver services and get revenue, you must be sure the stakeholders, including industry financial analysts, are quickly informed. If your enterprise is public, Section 409 of the Sarbanes-Oxley Act requires such notification.