November 8, 2002 2:53 PM PST

Microsoft picks compliance committee

Microsoft said Friday it has established a compliance committee to enforce an antitrust remedy issued a week ago by a federal judge.

The Redmond, Wash.-based company had 30 days to create the committee, made up of three Microsoft board members. James Cash, a professor at Harvard Business School and chairman of Harvard Business School publishing, will chair the committee. Cash joined Microsoft's board in June 2001.

Raymond Gilmartin, chief executive of Merck & Co., and former U.S. Secretary of Labor Ann McLaughlin also will serve on the compliance committee. The committee's next task is to hire a compliance officer to act as a liaison between the three members and federal and state trustbusters.

"The board of directors this week at its regularly scheduled quarterly meeting acted as it is required to do from the order from last Friday. It constituted (these) three individuals as the antitrust compliance committee," Microsoft's general counsel Brad Smith said Friday.

Microsoft's board "wanted to move forward promptly" rather than wait the full 30 days, he added. "The board wanted to underscore its determination to implement the obligations it assumes under last Friday's order."

All three people have served as Microsoft directors for less than two years.

The reasoning behind choosing board members to act as a compliance committee stems from the increased emphasis on fiscal responsibility in the post-Enron and post-WorldCom business world.

"All publicly traded companies are faced with challenges finding the right people from among their outside board members to staff audit committees and other important subcommittees of the board," said Rich Gray, a Menlo Park, Calif.-based attorney closely watching Microsoft's antitrust case. "Microsoft has the additional challenge of staffing yet another committee, an antitrust committee to advise the board."

The compliance committee is separate from the technical committee that also will oversee a separate settlement in the case.

In two decisions issued last Friday, U.S. District Judge Colleen Kollar-Kotelly approved a settlement between Microsoft, the Justice Department and nine states and imposed a separate remedy for litigation continued by nine other states and the District of Columbia.

Under the terms of the settlement, a three-person technical committee is responsible for enforcing the agreement. In December, Microsoft picked former federal prosecutor Odell Guyton as director of compliance and David Dadoun, a former Federal Trade Commission antitrust enforcement lawyer, to head an internal company antitrust program.

The technical committee also will be made up of three people. Microsoft and the Justice Department will each choose one person, and those two people will pick a third member.

In their call for tougher sanctions than the settlement, the plaintiff states asked Kollar-Kotelly to impose a more stringent compliance mechanism. The states argued the settlement would give Microsoft too much involvement in the enforcement process to make it effective.

Kollar-Kotelly's remedy in the plaintiff states' case is nearly identical to the settlement, but with several modifications, including some of the requested enforcement changes.

"Even though the two remedies--the settlement and the one imposed--are 95 percent the same, they're parallel so to speak," said Bob Lande, an antitrust professor with University of Baltimore Law School. "So you have two separate committees for enforcement. It's an awkward system, but it has to work."

A compliance committee, made up of three Microsoft board members who are not current or former company employees, would enforce the remedy. Three of the eight board members, including Chairman Bill Gates and CEO Steve Ballmer, would be ineligible to serve on the compliance committee.

"The committee will need to develop a work plan right away, and the committee will need to hire a compliance officer," Microsoft's Smith said. "The committee members made clear at the board meeting they will play a rigorous role--and that's as it should be--given the terms of last Friday's order."

From Microsoft's perspective, the two mechanisms make up "five potential levels of compliance review," Smith said. The first: Microsoft created an internal compliance program last year. "More broadly, I am designated by the board as the company's chief compliance officer," Smith said.

The second and third mechanisms are the two committees: technical and compliance. "The fourth level is review by the federal and states agencies, and the fifth is review by the court," Smith said.

But for direct issues stemming from complaints lodged by Microsoft competitors or customers, one or both committees would be the focal point of enforcement. The Justice Department, Microsoft and nine states--Illinois, Kentucky, Louisiana, Maryland, Michigan, New York, North Carolina, Ohio and Wisconsin--are the focus point of the technical committee. The compliance committee would represent the remedy imposed on behalf of the District of Columbia and nine other states--California, Connecticut, Florida, Iowa, Kansas, Massachusetts, Minnesota, Utah and West Virginia.

"The two committees serve complementary roles," Smith said. "They certainly don't conflict."

Still, both mechanisms have their faults. "The compliance committee should be proactive, but my sense is the technical committee isn't necessarily so," Gray said. The plaintiff states took issue with this more passive role of the technical committee in their request for a stiffer remedy."

But Gray had a more fundamental problem with the three members of compliance committee. "None of these individuals seems to have a broad experience in the technology industry and the challenges that they face," he said.

Lande took a more cynical view of the compliance committee.

"So you're replacing the technical committee with Microsoft directors," he said. "Is this a joke? Is that ever a sweetheart deal for Microsoft."

 

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