Enron's ruinous legacy

Published on Sunday 28 May 2006 00:24

IF THE 1980s were the era of growth under the likes of Jack Welch and General Electric, the early years of the 21st century have a corporate face of their own: Kenneth Lay and his disgraced Enron corporation. The Enron scandal has played a key part in a reappraisal of American commerce. Enron, and other major corporate scandals such as WorldCom and Tyco International, revealed a class of plutocratic executives prepared to stop at nothing.

It is proving to have an impact on public opinion. As recently as 1999, the height of the dotcom boom, 73% of Americans had a favourable view of corporate America. By last October, according to the Pew Institute for Public Research, that figure had fallen to just 45%. American business is no longer trusted or seen as a trustworthy partner in the pursuit of life, liberty and self-improvement.

That Enron was so closely tied to a Texas Republican party that, not content with having one of its own in the White House also boasted Houston's Tom DeLay as the most powerful figure in the House of Representatives, merely confirmed the electorate's worst suspicions that Big Politics and Big Business were joined at the hip to the exclusion of the public interest.

The vast bonuses paid to executives at a time when average wages were stagnating scarcely helped. Other concerns over the economic benefits of globalisation, crystallised in a fear of cheap imports from China and Latin America plus concerns over the transfer of American manufacturing and service jobs to Mexico or India, have also dented American confidence in corporate America. A more sceptical approach might also be a natural reaction to the giddy, irrationally exuberant days of the 1990s when stocks seemed destined to soar forever and a new business paradigm was being discovered every second month. Lay's defence that his company's downfall was essentially the fault of mean-spirited and mischievous journalists was as remarkable as it was laughable.

"Enron is one of the great frauds in American business history," Boston University's James Post told the New York Times. "But it is also a symbol of a particular era of management practice. The excesses point pretty clearly to what was going on in mainstream companies across the business landscape in the 1990s."

Theoretically another Enron is impossible because of legislation passed since the scandal was first discovered five years ago.

Congress's Sarbanes-Oxley act - named after its two sponsors - tightened regulations, forcing companies to be more transparent in their records.

Now, however, big business is complaining that Sarbanes-Oxley goes too far and needs to be reformed. Republican Senators Jim DeMint and Tom Feeney have introduced legislation to amend Sarbanes-Oxley, loosening some of the reporting obligations it places on companies.

To the act's critics, the guilty verdicts handed down in Houston are evidence that the legal process itself is working and does not need to be buttressed by increased regulation.

Among Sarbanes-Oxley's provisions is the requirement that public firms' leading officers sign their names to certify that a company's disclosed financial records and income are accurate, leaving them personally liable if fraud is subsequently discovered. Executives must also now inform investors when they plan to sell their own stock.

Defenders of Sarbanes-Oxley note that had it been law before the Enron debacle, the energy firm's employees would have known that Lay was dumping his stock even as he told investors that he had great faith in the company's resilience, probity and future.

"What Enron stands for is multiple gatekeeper failure - the board failed, the auditors failed, the outside law firm failed," said Thomas Dunfee, a professor of business ethics at the University of Pennsylvania's Wharton School of Business. "I think we learned that just having prestigious and good quality people in key positions is not enough. We have to pay attention to the kind of legal incentives that we provide."

The cost of compliance with Sarbanes-Oxley is disproportionately felt by smaller companies. A Government Accountability Office report concluded that while major corporations paid just 13 cents in extra auditing fees per $100 of income, companies worth less than $75m paid $1.14 in fees for every $100 they brought in.

The changes have been good news for the London Stock Exchange and other European financial markets as foreign capital becomes more wary of subjecting itself to stiffer American regulation.

"American exchanges are losing a generation of small companies that are going overseas to list," argues Patrick Daugherty, a former lawyer for the Securities and Exchange Commission (SEC). "We're also losing foreign-company listings to London and elsewhere."

A record 139 foreign firms listed on the LSE last year while a mere 15 new international listings were announced in New York, down from more than 50 each year just a decade ago. In 2001, nine of the 10 largest international IPOs took place in New York; last year just one of the 25 largest global offerings took place in the US. American companies are also flocking to the Alternative Investment Market (AIM), with 19 signing up for the exchange last year alone as it becomes the exchange of choice for new European start-ups.

That change, prompted at least in part by Sarbanes-Oxley, explains the desire of both the NYSE and the Nasdaq to acquire European holdings since, at present at least, that would give them the best spread of options for future growth even if Sarbanes-Oxley's tentacles never reach across the Atlantic.

Globalisation has also meant a New York listing is less important than it once was as capital becomes ever more fluid. Consolidation would allow Nasdaq, which has a 25% stake in the LSE, and the NYSE, which is attempting to merge with Euronext, to regain their global pre-eminence. As Jamie Selway, managing director of brokers White Cap Trading, told Business Week: "If you can't beat 'em, buy 'em."

Nicole Gelinas, of the Manhattan Institute's City Journal, said: "The NYSE may be trying to buy Euronext in part to encourage smaller and mid-sized American companies to go public in Europe if it's financially prohibitive for them to do so here. American companies could list their shares abroad to raise capital in euros and still do business in the US."

Meanwhile in Houston, Jeffrey Skilling and Lay await their fate. They will not be sentenced until September but each man could face up to 25 years in jail for their crimes. That was the sentence handed down to WorldCom's former chairman Bernard Ebbers for leading an $11bn fraud.

That, in as much as they pause to consider its implications, cheers ordinary working Americans but troubles corporate board members who fear that the Enron scandal has sparked an over-reaction that will damage American competitiveness.

Indeed, Enron is merely the highest profile example of renewed prosecutorial zeal.

A White House fraud task force confirmed this week that it had secured more than 1,000 convictions and guilty pleas in the past four years, while New York's attorney general, Elliot Spitzer, is building his political career on the back of his tough policing of Wall Street brokerage firms.

In that respect too, the impact of the biggest corporate scandal of recent times is still being felt.

Not the least of which is the sense that it will take more than a handful of high-profile prosecutions to banish the idea that corporate America has become accustomed to operating under its own laws, as arrogant and presumptuous as it is unaccountable.