“The Role of the Board of Directors in Enron’s
Collapse”
Chairman Joe
Lieberman
May
7, 2002
Thank you, and thanks to the Permanent Subcommittee
on Investigations for holding this important hearing, which
initiates the next phase of the Senate Governmental Affairs
Committee’s investigation of the scandalous collapse of the
Enron Corporation.
Over
the past six months, we’ve all heard many reports about who
failed Enron’s shareholders and employees leading up to the
company’s fall—obviously the company’s management has been
cited, Arthur Andersen, government watchdogs, stock analysts,
rating agencies. There were bad decisions, breakdowns, and
betrayals at several links in the oversight chain. Today we focus on another group that deserves some of the
blame for failing to uncover the crookedness in the company’s
behavior books, and that is the company’s board of directors.
Textbooks tell students that the board of directors
is the group of individuals elected by the shareholders to watch
over the management of a corporation on behalf of the
shareholders. Board members are, in essence, like trustees or
guardians for the shareholders and, in a larger sense, for the
integrity and reliability of our economic system.
In fact, because of their essential role, directors
by law owe special duties to the corporation and particularly
its shareholders: duties called “loyalty” and
“care.” Loyalty,
meaning freedom from conflicts of interest—in other
words, serving shareholders and only shareholders with
independence and undivided attention.
Care meaning doing your work responsibly,
thoroughly, and in good faith.
By all appearances, Enron’s board of directors failed
their shareholders on both these counts.
Even though a majority of Enron’s board was made up
of “outside” directors—meaning directors not in Enron’s
management—a stunning 10 of the 15 most recent outside
directors had conflicts of interest including contracts with
Enron, common bonds to charities, and memberships on the boards
of other companies doing business with Enron.
Some examples: charities close to some of the
directors were supported heavily by Enron and its officers. Two
directors had earned more than $6.5 million in consulting fees
from Enron since 1991. One director served on the board of a
company that in 1999 signed a $1 billion energy management
agreement with an Enron affiliate.
Arrangements like this can divide, or even redirect,
a director’s loyalties to the hand that feeds
them—management—and away from their single-minded
responsibility to the shareholders.
Consulting contracts or large donations to favored
charities whittle away the objectivity directors must
bring to every decision they make, and leave shareholders
without the protectors they need.
Second, let’s talk about the directors’ duty to
take care and be diligent in overseeing the management of the
company.
The more we look, the more evidence we find of
inadequate oversight. In 1999, the board went so far as to suspend
Enron’s code of ethics—on two separate occasions—to allow
the company’s chief financial officer, Andrew Fastow, to run
partnerships that would make deals with Enron. That to me was
extraordinary and extraordinarily irresponsible: rather than
raising a red flag, the board gave a green light to Mr. Fastow
to, as Sherron Watkins put it in her testimony before the Senate
Commerce Committee, “put his hands in the Enron candy jar.”
As the
shareholders’ elected representatives, the board of directors
have an affirmative obligation to ask questions and get
answers. We’re talking about qualified individuals who had a
professional understanding of the industry and impressive
credentials.
Let me read a few of those credentials:
Former Chairman of the Executive Committee of Gulf
& Western Industries… Former Chairman of the U.S.
Commodity Futures Trading Commission… Former United Kingdom
Secretary of State for Energy… Professor of Accounting and
former Dean of Stanford Business School…
The question is, why all that experience, and so much
more, accomplished so little for shareholders of Enron.
To me, the directors’ lack of diligence is even
more troubling in light of the fact that they profited so much
from their positions as board members.
In stock sales alone, some made hundreds of thousands,
and a few made more than a million dollars.
The Board of Directors didn’t just fiddle while
Enron burned. They toasted marshmallows over the flames.
Even as those flames shook our economy and engulfed the
dreams of thousands of dedicated Enron employees who lost not
only their jobs but their retirement security.
The
flagrant failure of Enron’s board of directors is a warning we
must heed. The more than 100 million people whom we call the new
investor class, those middle-class Americans who entered the
market in the 1990s, are shaken. They’re asking:
if the distinguished Enron board failed so utterly in
this case, how many other boards might be negligent?
After all, investment capital is the lifeblood of our
free market economy. So the belief that directors are failing
their shareholders is a threat to the health of our economic
system. We cannot let it grow or go untreated. We all must work
together now to restore shareholder’s confidence.
There are many proposals of potential reforms that
have been made to strengthen directors’ accountability. I
believe called for giving the SEC new powers to remove negligent
directors from their boards and ban them from future service on
the boards of any other public company. I’m also very
interested by proposals to ban or limit company stock sales by
directors for the duration of their terms and to impose
mandatory term limits on directors.
And I strongly support the call to the stock
exchanges to adopt listing requirements that would require
companies to limit the number of insiders who can serve on
boards, and to restrict directors from serving on more than a
given number of boards, and to prohibit behavior that amounts to
conflicts of interest.
As
usual, self-regulation by the companies and by the stock
exchanges would be the most direct and effective path to reform.
But if there is inadequate self-regulation, there is no question
some government action will be necessary to prevent the most
egregious abuses of responsibility by boards of directors.
About 100 years ago, the satirist Ambrose Bierce
defined a corporation as, “An ingenious device for obtaining
individual profit without individual responsibility.”
Let us work together now to make sure that cynical joke
does not become a prophesy.
Let’s make sure that directors are accountable and
vigilant, and shareholders’ first line of defense against
corporate negligence, mismanagement, or corruption, and that
they give investors the confidence our economy needs to grow as
robustly as we all want it to.
Thank you.
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