Four Ideas for Reforming Corporate Governance Post-Enron

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

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
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’
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
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 A
group has formed in Minnesota to pursue passage of the new law
there, led by John Karvel

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.

Marjorie Kelly is editor and publisher of
Business Ethics magazine ( and author of
the recently published The Divine Right of Capital (Nov. 2001,
Berrett-Koehler). This article may be reprinted without charge as
an opinion piece in newspapers, on websites, and in newsletters.
Feel free to distribute it to friends via email.

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