The Reasons behind a Corporate Collapse: A Case Study of Enron Abstract The 21st century has already experienced main reforms in the major corporate structures. The Surbanes Oxley Act 2002 in USA and the Higgs and Smith reports (2003) in UK have brought paramount reforms in the two major corporate systems. These reforms were made following the major corporate collapses like Enron, WorldCom, Adelphia, Global Crossing, K. Mart and Parmalat. Among these corporate collapses Enron is deemed to be the greatest tragedy in corporate history. This article examines the reasons behind a corporate collapse and point out the possible discrepancies. The example of the fallout of Enron is taken to explain a corporate collapse.
Name:
Muhammad Asif Khan LLM (University of Liverpool) Member Khyber Pakhtunkhwa Bar Council
Address: Village & P.O. Tarujabba, Tehsil PAbbi & Distt. Nowshera Email:
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Electronic copy available at: http://ssrn.com/abstract=1923277
INTRODUCTION: The 21st century has already experienced main reforms in the major corporate structures. The Surbanes Oxley Act 20021 in USA and the Higgs and Smith reports (2003) in UK have brought paramount reforms in the two major corporate systems. These reforms were made following the major corporate collapses like Enron, WorldCom, Adelphia, Global Crossing, K. Mart and Parmalat. Among these corporate collapses Enron is deemed to be the greatest tragedy in corporate history.2 Some call it a Titanic miscalculation,3 and some compare it with the frenzied corporation of Charles Ponzi.4 By 31st December 2000, Enron’s stock was priced at $83.13 and its market capitalisation exceeded $60 billion dollars. It was also rated as the most pioneering large company in Fortune’s Most Admired Companies survey. A year later on 2nd December 2001, Enron filed for bankruptcy. The investors lost about $80 Billion.5 Thousands of Enron employees lost not only their jobs but a significant part of their retirement savings; Enron’s shareholders saw the value of their investments tumble; and hundreds of businesses around the world were affected, Enron creditors turned into the bankruptcy court likely to receive only pennies on the dollars owed to them. This sudden demise of Enron opened speculative debates on the future of corporate structure. The fall of Enron has been related to different discrepancies in its corporate structure.
Enron was created in 1985 by Kenneth Lay, through the merger of two natural gas pipeline companies. Starting with gas pipelines it extended its work and got involved in natural gas trading. Deregulation of the energy market in 1980’s followed by the deregulation of electricity market in 1992 was taken as granted by Enron. This deregulation allowed energy providers to expand their approach and become more competitive. Enron diversified with these changes, it became a market maker in electric power, coal, steel, paper and pulp, water, and broadband fiber optic cable capacity. Its domestic trading and international business grew dramatically through the 1990’s. This diversified trading model of Enron was envisioned by Jeff Skilling in 1988,6 he served Enron as President and Chief Operating Officer (COO), and eventually became the CEO of the company for 6 months, before he resigned in August 2001 1
See Sarbanes‐Oxley Act (2002), Pub. L. No. 107‐204, 116 Stat. 745 (2002). R.Powell, ‘The Enron Trial Drama: A New Case for Stakeholder Theory’, 38 (2006) University of Toledo Law Review, at p. 1087. 3 See N.B. Rapoport, ‘Enron, Titanic, and the Perfect Storm’, 71 (2002) Fordham Law Review, pp. 1373–1397. 4 See D.G. Baird and R.K. Rasmussen, ‘Easy Lessons from Enron’, 55 (2002) Vanderbilt Law Review, pp. 102‐130. 5 J.Webber et al., ‘Arthur Anderson: How Bad Will It Get?’, (December 24, 2001) Bussiness Week, at p. 30. 6 Jeff Skilling joined Enron in 1990 from McKinsey, but he envisaged the diversified version of Enron in 1988, in a Mckinsey engagement at Enron. It was Jeff Skilling who pushed the pipeline company into an energy bank. 2
Electronic copy available at: http://ssrn.com/abstract=1923277
(about 4 months before Enron filed for bankruptcy). Enron was a “market maker” and a creator of new types of products, Jeff Skilling once said, “We are a company that makes markets. We create the market, and once it’s created, we make the market”.7 The Accounting approach of Enron before diversification was simple; the company listed actual cost of supplying the gas and actual revenues received from selling it. Then it adopted the “mark-tomarket” accounting.8 This proved challenging and tricky as it is based on assumptions of future profit making, especially when the market conditions are specified through predictions. The other controversial practise of Enron was the use of Special Purpose Entities (SPE’s). Special Purpose Entities are shell firms created by a sponsor, but funded by independent equity investors and debt financing. For example, Enron used SPE’s to fund the acquisition of gas reserves from producers. In return, the investors in the SPE received the stream of revenues from the sale of the reserves. Enron used many SPE’s till 2001, including Chewco (a company owned and operated by an Enron employee called Michael Kopper), Raptor, and in 1999 the LJM partnerships in which Andrew Fastow9 was the manager and an investor. In these partnerships key Enron employees like Fastow profited handsomely. These SPE’s were also used in off balance sheet financing, depicting a false picture of company’s economic status. Another name to mention in the story of Enron is its audit firm ‘Arthur Anderson’. It was Arthur Anderson who knew all the financial mishaps closely, more than anyone else.
The fall of Enron has raised many questions regarding corporate governance. Thus we will discuss the Enron failure in light of the role of different corporate governance players. We will analyse the role of directors, the shareholders and stakeholders, and the gatekeepers in Enron’s demise. Keeping the Enron’s example in front we will discuss the importance of the role of these players in corporate governance. We will also examine whether this collapse could have been avoided, and how can future collapses be avoided. Following the Enron scandal the key players also got capital sentences as a criminal liability. We will also discuss the importance and need of criminal liability in corporate governance.
7
S.Deakin and S.J.Konzelmann, ‘Learning from Enron’, 12 (2004) Corporate Governance, at p. 135. A technique whereby the entire profit to be derived from the spread between the long and short run contracts is taken into earnings upfront, at the time when the contract is signed. 9 Andrew Fastow remained Enron's Executive Vice President and Chief Financial Officer (CFO). 8
THE BOARD OF DIRECTORS: A company’s board is its heart and as a heart it needs to be healthy, fit and carefully nurtured for the company to run effectively.10 In USA the boards are usually large. The CEO and the chairman is the same person in most companies. In 2001, Enron’s Board of Directors had 15 members, several of whom had 20 years or more experience on the Board of Enron or its predecessor companies. Customarily, they had five regular meetings per year, each of which began with a dinner followed by two full days of meetings thereafter.11 Many of Enron’s Directors served on the boards of other companies as well. It was organised into five committees; Executive committee, Finance committee, Audit Committee, Compensation committee, and Nominating committee. Kenneth Lay was performing two responsibilities as CEO and chairman, followed by Skilling as the president and COO of the company. A Board’s duties include reviewing the company’s overall business strategy; selecting and compensating the company’s senior executives; evaluating the company’s outside auditor; overseeing the company’s financial statements; and monitoring overall company performance. In short the board’s duty is to safeguard the interests of the company’s shareholders.12 The directors also hold a fiduciary duty towards the shareholders to safeguard the investment they had made in the company. Enron’s board members were compensated with cash, restricted stock, phantom stock units, and stock options.13 The total cash and equity compensation of Enron Board members in 2000 was valued by Enron at about $350,000 or more than twice the national average for Board compensation at a U.S. publicly traded corporation.14
The Enron Directors seemed to indicate that they were as surprised as anyone by the company’s collapse. But there were more than a dozen incidents over three years that should have raised Board concerns about the activities of the company.15 The board had known about the different SPE’s including LJM and Chewco, it was briefed about their purpose and
10
J.Soloman and A.Soloman, ‘Corporate Governance and Accountability’ (WILEY, 2004), at p. 65. ‘The Role of the Board of Directors in Enron’s Collapse’, A Report Prepared by the Permanent Subcommittee on Investigations of the Committee on Governmental Affairs United States senat,. at p.9. 12 “Statement on Corporate Governance,” The Business Roundtable (September, 1997) at para. 3. 13 Supra note 11, at p. 11. 14 See “Director Compensation; Purposes, Principles, and Best Practices,” Report of the Blue Ribbon Commission of the National Association of Corporate Directors (2001), at p. 5. 15 See Supra note 11, at p. 12. 11
nature.16 Much of what was wrong at Enron was not concealed from its Board of Directors. High risk accounting practices, extensive undisclosed off-the-books transactions, inappropriate conflict of interest transactions, and excessive compensation plans were known to and authorized by the Board.17 The most serious of the conflicts related to the involvement of Enron corporate officers in setting up and running some of the sham SPEs with which the company dealt. Michael Kopper, a senior employee in the finance section of the company, ran the Chewco SPE through a series of limited partnerships and companies which he controlled. Fastow ran the LJM SPEs and was prominently involved in several of the entities used as part of the Raptor transactions, as were a number of more junior Enron employees in accounting and finance positions. Fastow’s involvement in the LJM deals was not only disclosed to the board, at a meeting which took place in 1999, but the board approved of his participation, following a recommendation to this effect from the then CEO and Chairman, Ken Lay.18 The directors though disagreed with these allegations and contested that things were concealed from them, for instance Mr. Winokur, former head of the Finance Committee stated that “We cannot, I submit, be criticized for failing to address or remedy problems that have been concealed from us.”19 So if the directors knew about all the doubtful transactions going on at Enron, then they had a duty to be more vigilant and active in questioning all these mishaps. If, for instance, the directors were unaware of the correct situation then they were irresponsible and had a lack of interest in their job. Moreover Fastow received $30 million in return for his part in the deals with LJM. It was only in October 2001, when the deals were falling apart, that the board asked and learned about the extent of Fastow’s remuneration. Following this, it decided to suspend him from his employment with Enron. It is far from clear that Fastow committed any legal wrong in not notifying the board, since the sums in question were not received in his capacity as Enron’s CFO. It is, however, difficult to explain why the board made no earlier inquiry on the matter.20 They should have done more in safeguarding the shareholders interests, by failing to do so they had breached their duty. Thus the directors shared a responsibility in the collapse of the company. This shows lack of independence of the directors, most of the work was carried through by the Skilling and Lay. So the involvement of the directors in the key matters of the company has to be made practicable by giving more collective powers rather than an individual approach. 16
See Supra note 11, at p. 15. See Supra note11, at p. 16. 18 Supra note 7, at p. 138. 19 Ibid. 20 Ibid. 17
As in most other US companies, Enron’s management was heavily compensated using stock options. Heavy use of stock option awards linked to short-term stock price may explain the focus of Enron’s management on creating expectations of rapid growth, and its efforts to puff up reported earnings to meet Wall Street’s expectations. In its 2001 proxy statement, Enron noted that within 60 days of the proxy date (February 15), the following stock options awards would become excisable, 5,285,542 shares for Ken Lay, 824,038 shares for Jeff Skilling, and 12,611,385 shares for all officers and directors combined. On December 31, 2000 Enron had 96 million shares outstanding under stock option plans, almost 13 percent of common shares outstanding. According to Enron’s proxy statement, these awards were likely to be exercised within three years, and there was no mention of any restrictions on subsequent sale of stock acquired. After the deregulatory reforms in 90’s, the Security and Exchange Commission (SEC) changed the rules under section 16(b) of the Securities Exchange Act of 1934, to permit officers and directors to exercise stock options and sell the underlying shares without holding the shares for previously required six months period.21 Now under these rules if the executives increase the stock price through premature revenue recognition (as it was done through mark-to-market accounting in the case of Enron) or other techniques, they could sell their stocks in short term, leaving the shareholders to bear the cost of the stock decline, later when the stock price could not be maintained.22 Hence the personal gain of the key players in the company gains importance with such rules and the shareholders interest is kept aside.
The absence of a remuneration committee kept the directors remunerations unchecked, and transparency in this regard was missing. The Board members were involved in getting stock and cash compensation and extra amount for consultancy. For instance Enron paid Lord John Wakeham, a chartered accountant, $72,000 per year for consulting services in accounting.23 Board member John Urquhart and his Connecticut based consulting firm received $493,914 in 2000.24 Board member Charls Walker, a tax lobbyist, received $70,000, paid to firms he controlled.25 A company on whose board director Herbert Winokur also served, the National Tank Company, sold $1,035,000, $643,793, $535,682 and $370,294 of equipment to Enron in 21
J.C.Coffee jr., ‘What Caused Enron?: A Capsule Social and Economic History of the 90’s’(2003) Columbia Law School, Working Paper No. 214, at p. 37. 22 Ibid, 23 Supra note 11, at p. 51. 24 Ibid. 25 Ibid. at p.52.
the years 1997-2000.26 The directors clearly played double role for extra gains. The role of a director should only be limited to his job, if any director want to get involve in some other way, then he should cease to be a director. High board compensation thereby prevented the board from seeing early signs that the underlying reality was crumbling. The role of nonexecutive directors was also contentious. They were controversial because they received payments as consultants, some received money in form of gifts to their universities and hospitals.27 The Sarbanes Oxley act and the Higgs report have thus stressed upon more independence for non-executive directors. The role of the non-executive directors can only be improved by more involvement; a non-executive director may be well qualified but if he/she doesn’t have the requisite knowledge about the company they are least functional. Moreover a formation of a remuneration committee consisting of outside directors will bring transparency and fairness within the remuneration system.
SHAREHOLDERS AND STAKEHOLDERS: Shareholders expect a return on their investment to compensate them for bearing risk. The riches on which the large edifices of the companies stand belong to the shareholders. The stakeholders on the other hand are involved in running the business. The role of these players has been of silent spectators in running a company when everything seems to go in the right direction, albeit it’s an illusion. The shareholders and stakeholders in some cases should be involved in the company matters; in some technical cases their involvement may not be possible. For instance the appointment of the key players within the company should be done by the approval of the shareholders. Ken Lay as the CEO in case of Enron was involved in making key appointments. Thus shareholders must shoulder some of the blame. Management was often forced to live up to unreasonable expectations. If expectations are not met through actual results, they can be achieved through forged results. This keeps everyone happy for a while, but in the long run it’s a failed game.
In some cases approval of the shareholders is not practicable. Thus in context of a listed company such as Enron, approval by the board will almost certainly suffice. With a dispersed shareholder base it is impracticable to require shareholder approval in such a case, and corporate law generally does not insist upon it. Fastow’s involvement was, however, 26 27
Ibid, at p. 51‐52. Supra note 7, at p. 139.
disclosed to shareholders in Enron’s annual report for 2000, after the transactions were undertaken but well before the company’s difficulties began.28 When everything is going well on papers the investors tend to reduce their reliance on gatekeeping services based on their false belief that extraordinary returns will persist.29 In case of Enron, many investors were likely misled by such overvalued earnings, but they should have been more vigilant;30 particularly when about 60 percent of the stock owners were institutional investors. So, when everything is going on smoothly then the investors are least bothered, thus the role of these investors along with other stakeholders should be more than just a silent observer. For instance the shareholders should have noticed the high remuneration of managers and directors. So investors can only intervene when they observe something unusual or alarming within the company. For instance the passengers in a ship have least knowledge about the technicalities of running a ship; it is the captain and his crew who have the requisite expertise. The passengers though have paid to be on board, but still can’t do much if the ship hits an iceberg.
GATEKEEPERS: Gatekeepers are reputational intermediaries who provide verification and certification services to investors.31 After the fall of Enron the question was raised that, what the gatekeepers were doing during all these mishaps. The US accounting rules enabled companies to set up corporate vehicles, or the SPE’s, to manage assets off balance sheet. To improve its financial statements Enron indulged in fraudulent transactions with fake affiliates. The debt on its balance sheet was shifted to the fake affiliate’s balance sheet. Enron’s gatekeepers i.e. its investment banks, attorneys and accountants were allegedly involved in these fraudulent transactions.32 The SPE’s were those fraudulent entities used for this purpose. Enron’s financial statements were overvalued by the help of these SPE’s. Enron’s fall was probably unavoidable once the fraudulent SPE transactions began to unravel in the autumn of 2001. Chewco was the first SPE to be wound up and the LJM and Raptor transactions then followed. In each case Arthur Andersen having initially approved the deals,
28
Ibid, at p. 138. Supra note 21, at p.34. 30 Ibid. 31 Ibid, at p. 13. 32 See G.J.Aguirre, ‘The Enron Decision: Closing the Fraud‐Free Zone on Errant Gatekeepers’, 28 (2003) Journal of Corporate Law, at p. 453. 29
now told the company that they were incompatible with accounting principles.33 Instead of checking these sham transactions and briefing the company directors about the dangers related to it, the auditors neglected these acts to create a wrong impression in the market. The revelations of these sham entities, and its effect on the Enron’s balance sheet created a fuss and the credit rating agencies downgraded Enron’s long term debt.34 This later resulted in Enron’s bankruptcy. This was more than just a simple flaw in treasury management.35 The auditors were never asked to explain the situation and they did that just at the eleventh hour. The auditors were also involved in the “mark-to-market” accounting practises which were allowed under the SEC policies at that time; which proved as putting matches in the hands of a child.36 Thus it was the abuse of the “mark-to-market” practise which let Enron down.
Enron’s auditors also showed lack of independence in their work. Andersen received fees not just for auditing, but also for consultancy services; and it engaged in regular exchanges of employees with Enron. In 2000, Arthur Andersen earned $25 million in audit fees and $27 million in consulting fees. It also earned substantial fees, tens of millions of dollars, from organising the SPE transactions which were to prove most costly to the company. Enron’s legal advisers, Vinson and Elkins, were also directly involved in arranging these transactions. The Enron and other corporate scandals owed much to the decline in the professional standards of the legal and accounting “gatekeepers” during the 1990s.37 Thus the double role played by the Auditors i.e. the auditing and consultancy, should be separated. This practice was allowed within the US system at that time.
Unlike other companies Enron’s audit committee had more expertise. It consisted of 6 members chaired by Dr. Robert Jaedicke of Stanford University, an accounting professor and former dean of Stanford Business School. The committee held short meetings with a large agenda to cover.38 SO, inspite of having a better audit committee also failed to play a role that an audit committee should play. The reason can easily be guessed by the fact of short meetings that it held. The question here arises that with such experienced members in the 33
Supra note 7, at p. 138. Ibid. 35 J. Plender, ‘Going off the Rails’, in Global Capital and the Crisis of Legitimacy (Wiley, 2003), at p. 175. 36 B. Stewart & S. Stewart, ‘The Real Reasons Enron Failed’ 18 (2006) Journal of Applied Corporate Finance, at p. 116. 34
37
See J.C. Coffee jr., ‘Understanding Enron: Its about the Gatekeepers, Stupid’ (2002) Columbia Law School, Working Paper no. 207. 38 P.M. Healy and K.G. Palepu, ‘The Fall of Enron’ 17 (2003) Journal of Economics Perspectives, at p. 17.
committee, why did the committee failed to point out the deceptive activities on time. So the role of the audit committee should be enhanced to get more transparency and reliability. This can be achieved by a more responsible and independent committee with more frequent and meaningful meetings, giving ample time to discuss key audit issues. The committee should make sure that the investors have the adequate information about the company’s economic reality.39 In the case of Enron, for example, it might well have led to more transparent disclosure with regard to the special purpose entities. The audit committees should be vigilant enough to bring transparency in the work of a corporation.
Any annual review of the managers by the accountants or lawyers was not done in case of Enron. This was not a corporate governance practise before but this is now becoming a common practise.40 If the Enron transactions, especially the SPE’s related transactions were reviewed at an early stage, many mishaps could have been deterred, including the $45 million dollars accrued by Fastow out of LJM transactions. Furthermore it is the duty of the gatekeepers to point out the unfavourable practises and warn of its consequences. The lawyers need to say “The law lets you do it, but don’t....it’s a rotten thing to do.”41 So any mischievous act if detected by the lawyers, even if the act seems to be profitable should be pointed out. In other words lawyers need to behave as true counsellors to their clients, rather than as hired guns who are just following orders.42
The role of the credit rating agencies was also very contentious in the case of Enron. Senator Joseph Lieberman, whose Senate committee held the first hearings on Enron said, “The credit-rating agencies were dismally lax in their coverage of Enron. They didn’t ask probing questions and generally accepted at face value whatever Enron’s officials chose to tell them. And while they claim to rely primarily on public filings with the SEC, analysts from Standard and Poor’s not only did not read Enron’s proxy statement, they didn’t even know what information it might contain.”43 So the credit rating agencies also relied on the information given by the company. The agencies seem to be least interested as well when everything is going on well. The responsibility of the credit rating agencies is to show a clear picture of the 39
Ibid at p. 29. D.M. Branson, ‘Enron – When All Systems Fail: Creative Destruction or Roadmap to Corporate Governance Reform?’ 48 (2003) Villanova Law Review, at p. 1018. 41 Supra note 3, at p.1387. 42 Ibid, at p. 1391. 43 Senate Committee on Governmental Affairs, press release, “Financial Oversight of Enron: The SEC and Private‐Sector Watchdogs” (October 8, 2002). 40
progress of a company, thereby it has to rely on more than what it gets from the company itself.
CRIMINAL LIABILITY: The personal liability of the corporate managers and directors has increased in the last decade.44 The criminal liability in this regard was non-existent or negligible. Light sentences were awarded to the managers convicted of securities fraud.45 As mentioned earlier the start of 21st century brought major corporate reforms with it; one of the major consequences of the big corporate collapses is the increased criminal liability for corporate frauds. Major sentences were awarded to the managers and directors in case of WorldCom, Tyco and Enron, alongwith other corporate collapses. With such large amount of capital involved in the companies, the criminal liability for any fraud or misappropriation of money seems to be a necessity. In case of Enron, Lay was found guilty of all six counts against him and Skilling guilty of nineteen of the twenty-eight counts against him.46 Skilling was found not guilty of nine of the ten insider trading charges and guilty for all of the eighteen remaining charges, including conspiracy, securities fraud, and false statements. Though Skilling faced up to a 185-year jail sentence, he ultimately received a twenty-four year prison sentence on October 23, 2006.47 Lay was also found guilty on four counts related to bank fraud in a parallel bench trial, but he died of cardiac failure before sentencing on July 5, 2006.48 After the announcement of the verdict, a number of jury members made public statements indicating that they struggled to understand the complexity of Enron's missteps, but that the degree of harm to employees and the community influenced their decision to convict.49 Fastow pled guilty to two counts of wire and securities fraud, and agreed to serve a ten-year prison sentence. He became an informant and cooperated with federal authorities. Despite entering into a plea agreement to serve 10 years in prison, Fastow was sentenced to six years, followed by two years of 44
J.R. Kroger, ‘Enron Fraud and Securities Reform: An Enron Prosecutor’s Perspective’, 76 (2005) University of Columbia Law Review, at p. 110‐111. 45 Id. 46 See Mary Flood, Ex‐Enron Bosses Closer to Prison, Houston Chronicle, May 26, 2006, available at (last visited on 2nd May, 2011). 47 Tom Fowler, Skilling Gets 24 Years in Prison for Enron Fraud, Houston Chronicle, Oct. 23, 2006, (last visited on 2nd May, 2011). 48 See Kurt Eichenwald, An Enron Chapter Closes: The Overview; Enron Founder, Awaiting Prison, Dies in Colorado, N.Y. Times, July 6, 2006, at Al. 49 See Supra note 2, at p. 1090.
probation.50 His wife, Lea Fastow, a former Enron assistant treasurer, pleaded guilty to a misdemeanour tax charge and was sentenced to one year, and an additional year of supervised release.51 Thus the major actors in the Enron story were destined for a sad ending. The judges acclaimed that they could not understand the complexity of the situation. This may lead us to a conclusion that we may need special juries for corporate crimes who could understand the corporate dealings. This may lead us to fair trials not dependent on the statements of a person who entered into a plea bargain.
CONCLUSION: The fall of Enron was an unavoidable collapse. Corporations depend upon risk taking; the stake of managers and directors is also involved in the companies. Thus risk taking should be calculated in order to safeguard the interests of shareholders and stakeholders to the best possibility. The Enron management indulged into activities in order to increase the company business, thereby risk taking was involved. Once involved in the questionable activities it was practically impossible to come out of the cumbersome situation; especially at the cost of company’s credibility. The only choice left was to take further risk and be on the edge in order to withhold the image of the company. While hoping for the best things went further wrong, especially when fraudulent conduct of some individuals like Fastow took over company’s interest. The only thing that could have saved Enron was “good governance”, but the then governance codes or rules left a window open for “bad governance”. For instance the allowance of the use of “mark-to-market” transactions by the SEC albeit it was misused by Enron depicts a governance failure, internally and externally.
To avoid another collapse like Enron all the corporate players will have to play their role effectively. The heart of the company (the directors) was unhealthy and unfit, thus the blood in the Enron’s veins could not run effectively. The board needs to be independent and active; if the board had checked the company transactions in detail then they should have noticed the sham transactions made through the SPE’s. Moreover had they been independent they would have posed harsh questions in this regards. The absence of appropriate committees also led Enron down. For instance remuneration committee would have been a check upon amount received by the managers and directors. The combination of the role of CEO and chairman is 50
See Edward Iwata, ‘Fastow’s Fast Track to Infamy’, USA TODAY, available 51 See Lea Fastow Enters Prison, CNNMoney.com, available .
also a contentious practise. The Shareholder’s role needs to be more active rather than being a silent spectator. They can play a policing role in taking more interest in the company affairs (especially in considering the remunerations), rather than moaning about their fate after the company is vandalised. The Gatekeepers proved fatal for Enron’s creditors, thus the rotation of accounting partners rather than relying on the services of one can be effective. Independence of auditors by separating the consultancy and auditing role is also indispensable. Furthermore the role of the audit committee is important to inject transparency into the corporate finances. Any sham transactions can be identified early provided that the audit committee is independent and vigilant. The lawyers can play a gatekeeping role by blocking the way of any mischievous acts going on within the company. This can be achieved by giving them more independence rather than keeping them for advice which is seldom operated. The role of credit rating agencies is important as a gatekeeper, they need to rely on more realistic sources rather than the reports given by the companies. Finally the criminal liability for corporate fraud will decrease risk taking within the corporate business. The management rely on risk taking but with enhanced criminal liability they will always be afraid of a risk failure. Thus the criminal liability needs to be restricted to the fraud detection i.e. criminal convictions shall be made where fraud is detected. For instance Fastow was liable for his earnings from the fraudulent LJM transactions. Concluding Enron’s demise I would say it was character of the leadership which let Enron down and lack of accountability allowed dishonest conduct.
“What the literature teaches us is that the ethical behaviour is taught from the top down.... It is the management’s commitment to ethical standards that sets the tone”.52
52
M.C. Daly, ‘Panel Discussion on Enron: What Went Wrong? 8 (2002) Fordham Journal of Corporate and Financial Law.
BIBLIOGRAPHY Sarbanes-Oxley Act (2002), Pub. L. No. 107-204, 116 Stat. 745 (2002). R.Powell, ‘The Enron Trial Drama: A New Case for Stakeholder Theory’, 38 (2006) University of Toledo Law Review. N.B. Rapoport, ‘Enron, Titanic, and the Perfect Storm’, 71 (2002) Fordham Law Review, pp. 1373–1397. See D.G. Baird and R.K. Rasmussen, ‘Easy Lessons from Enron’, 55 (2002) Vanderbilt Law Review, pp. 102-130. J.Webber et al., ‘Arthur Anderson: How Bad Will It Get?’ (December 24, 2001) Bussiness Week. S.Deakin and S.J.Konzelmann, ‘Learning from Enron’, 12 (2004) Corporate Governance. J.Soloman and A.Soloman, ‘Corporate Governance and Accountability’ (WILEY, 2004). ‘The Role of the Board of Directors in Enron’s Collapse’, A Report Prepared by the Permanent Subcommittee on Investigations of the Committee on Governmental Affairs United States senate. “Statement on Corporate Governance,” The Business Roundtable (September, 1997). “Director Compensation; Purposes, Principles, and Best Practices,” Report of the Blue Ribbon Commission of the National Association of Corporate Directors (2001). J.C.Coffee jr., ‘What Caused Enron?: A Capsule Social and Economic History of the 90’s’(2003) Columbia Law School, Working Paper No. 214. G.J.Aguirre, ‘The Enron Decision: Closing the Fraud-Free Zone on Errant Gatekeepers’, 28 (2003) Journal of Corporate Law. J. Plender, ‘Going off the Rails’, in Global Capital and the Crisis of Legitimacy (Wiley, 2003). B. Stewart & S. Stewart, ‘The Real Reasons Enron Failed’ 18 (2006) Journal of Applied Corporate Finance. J.C. Coffee jr., ‘Understanding Enron: Its about the Gatekeepers, Stupid’ (2002) Columbia Law School, Working Paper no. 207. P.M. Healy and K.G. Palepu, ‘The Fall of Enron’ 17 (2003) Journal of Economics Perspectives.
D.M. Branson, ‘Enron – When All Systems Fail: Creative Destruction or Roadmap to Corporate Governance Reform?’ 48 (2003) Villanova Law Review. Senate Committee on Governmental Affairs, press release, “Financial Oversight of Enron: The SEC and Private-Sector Watchdogs” (October 8, 2002). J.R. Kroger, ‘Enron Fraud and Securities Reform: An Enron Prosecutor’s Perspective’, 76 (2005) University of Columbia Law Review. Mary Flood, Ex-Enron Bosses Closer to Prison, Houston Chronicle, May 26, 2006, available at (last visited on 2nd May, 2011). Tom Fowler, Skilling Gets 24 Years in Prison for Enron Fraud, Houston Chronicle, Oct. 23, 2006, (last visited on 2nd May, 2011).
Kurt Eichenwald, An Enron Chapter Closes: The Overview; Enron Founder, Awaiting Prison, Dies in Colorado, N.Y. Times, July 6, 2006, at Al. See Edward Iwata, ‘Fastow’s Fast Track to Infamy’, USA TODAY, available (last visited on 13th May 2011) “Lea Fastow Enters Prison”, CNNMoney.com, available (last visited on 13th May, 2011.) M.C. Daly, ‘Panel Discussion on Enron: What Went Wrong? 8 (2002) Fordham Journal of Corporate and Financial Law.
