Thanks for a great first week--I'm always amazed at the wide range of experience that comes together in our MBA program. From the insides of the financial world to the workings of values-oriented family businesses, we've definitely got a lot of rich perspectives and backgrounds when it comes to deepening our collective thinking about Ethics and Governance.As discussed, we will dig into Enron at the next session to explore specific questions related to governance and the oversight responsibilities of the board.
For those who want to know the "moral" of the Enron story, check out pages 3 and 4 of the U.S. Senate Subcommittee's Report on the Role of the Board of Directors in Enron's Collapse. This Summary of Findings and Recommendations gives you a quick idea of what the Senate felt went wrong and how it should be fixed.
For the "outcome" of the Enron story, here's a summary of the Sarbanes-Oxley Bill, which remains to this day the most important piece of legislation in terms of governance and influences business activity worldwide.
See you next week…
6 comments:
Found an interesting article from The Economist from July 2001, a few months before the issues at Enron were uncovered. Here's an exert, the original is behind a paywall it seems. Sounds like Andersen was already tainted:
"Could auditing be strictly independent, worried the SEC, when so much other business depended on it?
Confirming its worst fears was the case of Waste Management. The
accounts of the garbage-collecting business have been audited by the Chicago office of Andersen (né Arthur Andersen) for more than 30 years, but the unqualified audited accounts for the years of 1992 to 1996 were subsequently found to have overstated Waste Management’s pre-tax income by more than $1.4 billion. During that time, Waste Management paid Andersen $7.5m in audit fees and $11.8m for other services. In June this year, the SEC fined Andersen $7m for “improper professional conduct”, its first such case for more than 20 years."
Given the kick-in-the-guts impact of Enron and what we've talked about in Accounting and now Ethics, I was surprised to learn that there is currently discussion in the States over scaling back the the Sarbanes-Oxley regulations. The US Jobs Council argues that the regulations make it harder for small companies to go public and is recommending exempting companies with a market capitalization of $1-billion.
Interesting quote (from the article) from Barbara Roper, the director of investor protection at the Consumer Federation of America:
“The Jobs Council looks at job losses that are the direct result of a financial crisis brought on by weak financial regulation and proposes as a solution further weakening regulations,” Ms. Roper says. “[The pre-Sarbanes Oxley] accounting scandals, and the costly restatements that followed, were the job killers. If this proposal is adopted, we can expect a repeat of that painful lesson, with even worse consequences for our fragile economy.”
Apparently Obama is considering tweaking the regulations under pressure to create more jobs.
Here's the article's link:
http://www.theglobeandmail.com/globe-investor/investment-ideas/features/vox/a-desperate-obama-kicks-sarbanes-oxley-halfway-to-the-curb/article2204208/
Reading the role of Board Members in Enron Downfall, I noticed that the board members are well experienced and even carry degrees from reputed business schools. How can such people overlook the upcoming crisis in the company? Again, even if the SEC has norms of code of ethics as mandatory for the public companies, who will be forming such code of Ethics in the first place and who will ensure the validity and relevance of such ethics and whether it is maintained or not. Finally we will have to depend on the Board only. I would like to understand if the SEC with such norms can still make sure whether the Boards of other companies , after the enron crisis, are acting in a ethical way.
I see from the reading of role of Board Members in the Enron Downfall, that these members are highly experienced and qualified from reputed B-schools of the world and they overlooked the financial fraud. Even if SEC has introduced the mandatory presence of code of ethics for the public companies now, will this ensure that Boards of today's businesses will be ethical and moreover who will form those code of ethics and manage the same, wont it be the internal management. Are Introducing such control measures like (sarebane's Oxley act) ensuring the fool proof guarantee that now there wont be such frauds and people in the boards and senior management are ethical ? I would like to understand more if these measures proving to be effective or not.
I came accross an interesting article that's in the open from The Economist describing it's 'Mickey Mouse Governance'. I was reading this tonight and it seemed quite an interesting discussion after today's class..
It can be found here: http://www.economist.com/node/21532268
"AMONG the many voids left by the death of Steve Jobs on October 5th was an empty seat in the boardroom of Walt Disney, where he was the largest shareholder. Soon afterwards, Disney announced that Robert Iger, the media and theme-park giant’s chief executive since 2005, had signed a new five-year contract, at the end of which he will leave the firm. Next March Mr Iger will also become chairman of Disney’s board.
….
Still, Disney’s decision to combine the posts of chairman and chief executive infuriates corporate-governance activists. They see this merging of the two roles as a step backwards, allowing the possibility of a return to the lousy governance for which Disney was notorious under Michael Eisner, Mr Iger’s over-mighty predecessor."
In the aftermath of Enron, a set of reforms on governance regulation were introduced as an attempt to fill the gaps. This was just another episode of the battle of ideas opposing supporters of “Government regulation” and advocates of “self-regulation”. Certainly, the dimensions of the scandal provided sufficient support for those in favour of strengthening government regulation. Before the recent credit crisis an interesting struggle took place in the US. In 1997 Brooksley Born of the Commodity Futures Trading Commission (A very small agency inside SEC) made an attempt to introduce regulation to solve transparency issues associated with Over-The-Counter (OTC) derivatives. At the time she opposed fierce opposition from Greenspan (Fed), Rubin (Treasury Secretary) firm believers of free markets. That episode ended up with a defeat of supporters of “government regulation”. In 1998, a decade before the crisis, the hedge fund LTCM (Long-Term Capital Management) was in the verge of collapse. It was a big dealer of derivatives (extreme leverage!) that had to be bailed-out by its creditors. Indeed, the Fed organized this recue to prevent more troubles in the financial markets. Certainly this case presented the some of the elements seen a decade later in the credit crisis. Certainly, it did not reach the dimensions of Bearn Sterns or Lehman and there were no efforts to fill the regulatory gaps. Perhaps big scandals serve to remind that “ethical behaviour” implemented through government or self-regulation is essential to ensure sustainability of business and economies.
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