Four Ideas for Reforming Corporate Governance Post-Enron


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The picture on the front page of the New York Times in early May was memorable: five Enron directors with hands upraised, swearing to a Senate subcommittee they were not responsible for the company's collapse. Pathetic as they seemed, they were telling the truth. Corporate directors are not in any real sense 'directing' companies. And that's the problem.

In a telling moment before the subcommittee, the directors confessed they 'had no inkling that Enron was in troubled waters until mid-October 2001' right before the house of cards collapsed. This may seem unconscionable negligence, but it is more fundamentally a result of the design of corporate governance. Boards of directors don't govern because all essential governance happens before the board meets. State law mandates directors must act in the best interests of the corporation and its shareholders, which courts interpret to mean maximum share price. So as long as share price remains high, directors feel confident. Yet it was precisely the hyper-inflation of share price that destroyed Enron.

Post-Enron, it's clear that pursuit of profits must stay within ethical bounds, and that executives and shareholders may not enrich themselves by extorting the public or employees. Toothless codes of ethics like Enron's are no help. Ethical concerns must grow teeth which means biting into reform of corporate governance. While most proposals for reform today merely tinker at the margins, some get to the heart of the matter. Below are four of the best.

1. Ensure auditors really audit by making them fully independent. Instead of having companies be the 'bosses' of their own auditors selecting and paying the firms they want to work with a Corporate Accountability Commission could assign auditors and pay them from fees assessed on companies. That's the proposal of Ralph Estes, emeritus professor of accounting at American University, in his proposed Corporate Accountability Act (www.stakeholderalliance.org/CorpAccAct.html). The commission would be empowered to expand reporting requirements beyond stockholder needs to encompass data needed by other stakeholders such as pollution emissions, wages and benefits paid, and corporate welfare received.

2. Bar law-breaking companies from government contracts. Earlier this year, both Enron and Arthur Andersen were suspended from contracting with the federal government. Yet suspensions like these remain far too rare, as companies with far worse records still feed at the government trough in massive amounts. Lockheed Martin, for example, has an outrageous 63 violations and alleged violations, yet its 1999 government contract awards totaled $14 billion. 'There's no reason to be giving a contract to a repeat violator,' says Rep. Carolyn Maloney, a New York Democrat on the House Government Reform Committee, who plans to introduce legislation requiring a central database of contractor violations. Ultimately, contract suspensions or debarments should be required for companies who face more than one criminal conviction or civil judgment in three years that's the recommendation of the Project on Government Oversight (POGO) in its May report 'Federal Contractor Misconduct' www.pogo.org. Companies like Boeing with $14 billion in federal contracts, Raytheon with $8 billion, and General Electric with $1.6 billion, all have two dozen or more violations and alleged violations. If they faced threat of contract suspension, ethics would become a genuine bottom-line concern which is the only way to make ethics real to these folks.



3. Create a broad duty of loyalty in law to the public good. Today a corporate duty of loyalty is due only to shareholders, not to any other stakeholders, and Enron behaved accordingly using tricks to drive electricity prices up 900 percent in California and thus fuel a spike in the company's share price. Such piracy against the public good would be outlawed under a state Code for Corporate Citizenship, proposed by Robert Hinkley (RCHinkley@media2.hypernet.com), formerly a partner with the law firm Skadden, Arps, Slate, Meagher & Flom. His change to the law of directors' duties would leave the current duty to shareholders in place, but amend it to say shareholder gain may not be pursued at the expense of the community, the employees, or the environment. (For an article by Hinkley in Business Ethics, see www.DivineRightofCapital.com/change.htm.) A group has formed in Minnesota to pursue passage of the new law there, led by John Karvel (JKarvel@scc.net).

4. Find truly knowledgeable directors: Employees, If we're tired of boards with 'no inkling' of what's going on, we should seek directors who have a clue. Who better than the people who work at a company every day? As directors, employees would be concerned with the long term and not next quarter. Since we don't import people from outside the U.S. to govern the nation, why export people from outside companies to govern them? If the problem is that CEOs will appoint cronies, make board elections a real horse race: allow persons to self-nominate and run, being elected one by one, not as a slate. In short, get some real governance going. If Sherron Watkins had been on the Enron board, the whole scandal might have been averted.