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Enron Board's Role in Scandal Scrutinized

Published Sunday, January 20, 2002 in the Pioneer Press.

By Dave Beal, Pioneer Press Columnist

Now the company's stunning collapse has become an enormous scandal. In fact, it's quickly shaping up as a bigger mess than the ""Barbarians at the Gate'' fiasco that arose out of the RJR Nabisco takeover in the late 1980s.

Thousands of investors have lost millions of dollars. Thousands of employees have lost their jobs and their retirement savings. Arthur Andersen, the 85,000-employee accounting firm that was once the envy of the world, is imperiled. Some very bad actors probably are headed for prison.

Let's just say that the magazine's selection process was, well, flawed.

Then let's be far less charitable in grading the directors.

It's still early. We don't know the details of how Enron's directors allowed their management to hide the company's debt by pushing it off the Enron books into high-risk business partnerships.

But we know this much: Either the board didn't know what was going on and should have, or the board knew and failed to stop it. Either way, the directors failed in carrying out their responsibilities to Enron's shareholders, employers, customers and community.

Three Twin Cities board watchers suggest as much. Lisa Dercks, Ron Lund and John Stout go on to urge companies and their directors to take away many lessons from the performance of Enron's board.

Dercks, formerly associate general counsel at Honeywell, is vice president for ethics at the Center for Ethical Business Cultures in Minneapolis. Lund, a consultant, recently retired after serving as general counsel at Medtronic for 12 years. Stout, an attorney at Fredrikson & Byron in Minneapolis, heads the Minnesota chapter of the National Association of Corporate Directors.

""Ultimately, I lay this at this foot of the board,'' says Stout.

Says Dercks: ""To me, the directors clearly failed to ensure there was a system of checks and balances or an ethical business culture in place.''

Lund emphasizes that the directors' audit committee has to have people ""who are willing to get in the face of management.'' So far, there is little or no sign of that occurring at Enron.

Among the messages they see for corporate directors:

• Maintain a strong audit committee. A corporate board's audit committee should be its first line of defense against problematic accounting practices. The audit committee must have the mindset and the resources to forcefully raise questions about the work of outside or inside auditors.
  
  
• Monitor conflicts on interest. Some of Enron's directors had ties to various organizations that presented at least the appearance of conflicts. Also, Lund suggests the board could have done more to curb an alleged conflict at Andersen, which did both auditing and consulting bu0siness for Enron.
  
  
• Support an active compliance program. In a letter sent last August to Enron Chairman Kenneth Lay, Sherron Watkins, an Enron vice president, warned that improper accounting practices could ruin the company. She urged top company officials to make things right. Yet there is no indication the board responded effectively to deal with her concern.
  
  
• Monitor major disclosures by management. Last August, as questions were being raised internally about the partnerships, Lay reassured employees all was well at the company. Weeks later, Enron was forced into a major restatement of its earnings. On Dec. 2, the company fell into a Chapter 11 bankruptcy proceeding.
  
  
• Determine suitable stock ownership and trading policies. In 2000, Enron's directors were paid an average of $380,619 for their work, seventh-highest among 200 of the country's largest corporations, according to the Pearl Meyer & Partners pay consulting firm. More than five-sixths of their total came in the form of stock. 
  
  On Dec. 4, the Amalgamated Bank, a union-owned bank in New York City, filed a class action lawsuit alleging that 29 Enron officials, including eight directors, sold millions of dollars of Enron stock at inflated prices ""caused by the misstatements'' of earnings. Other stockholders and employees have been left with nearly worthless stock.
  
  
• Stamp out arrogance. ""In a big, fast-growing company that's got a lot of muscle around the world, when things are going well, that's an easy horse to ride,'' says Stout. ""You can get fooled by your own publicity. It sounds like Enron's directors didn't take their responsibilities seriously enough, particularly as the problems started to emerge. It's awfully easy to hear the siren's song.''
  
  
• Avoid exotic accounting. Stout notes that Enron's directors apparently came to view their firm as a ""new economy'' company, subject to accounting rules that differed from those of more traditional corporations. They allowed their management to de-emphasize hard assets and emphasize instead trading of all kinds of goods and services, using an untested business model that led to high-risk accounting practices.

Could a Minnesota board experience a battery failure approaching the debacle that Enron's directors must now account for? Absolutely, if it doesn't have the procedures, integrity and the culture in place to deal with major crises.

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