Enron Ethics with the Government
admin | Wednesday, July 29th, 2009 | No Comments »
Parmalat, BCCI and Maxwell are examples of major corporate failures that shocked the world prior to the inception of corporate governance in the 1980s. However, since the corporate scandal of Enron, corporate governance has brought about increased attention amongst regulators and all stakeholders world over particularly shareholders, banks and governments. This concern has resulted in a focus on the relationship between a company’s shareholders and its Board of directors, as well as the executive and non-executive directors.Inferred from its definition, corporate governance need to be more pragmatic in its operations ensuring that the company conforms to the laws and regulations.
The corporate governance structure specifies the distribution of rights and responsibilities among different participants in the corporation, such as, the board, managers, shareholders and other stakeholders, and spells out the rules and procedures for making decisions on corporate affairs. This is usually not the norm. Enron’s demise as a result of its excessive risks, conflict of interest and poor accountability on the part of its directors, does not seem to have scared other organisations. Recent events in organisations are not anything to write home about. Corporate governance is meant to govern not to be used as a witch-hunting exercise. However, the way things happen in the board room, corporate governance needs to be tightened if it can bring about the change so much needed at this time.
By the directors confirming that the company accounts comply with requirements in the Company Act, they become accountable to the entire stakeholders and responsible for safeguarding their assets and other of the Group and hence for taking reasonable steps for the prevention of fraud and other irregularities. Enron’s conduct indicated that its directors were not really complying. To date, there is increasing acceptance that in spite of legal duties remaining solely to shareholders, there is the view for companies to be more accountable to other stakeholders including workers. Even though this view is being challenged both in America and the U.K, shareholders still want to wield more powers to maintain their investment. This is evident in the recent demonstrations by shareholders describing directors as ‘fat cows’.
Considering the relevant principles missed by Enron in its operations in comparison with Next, it is gainsaying the fact that some of the mistakes Enron made are still going on in some organisations around the globe-unnecessary risk-taking; performance-related pay schemes including share options to Executives with the non-executive directors sitting aloof doing nothing. Enron’s Board’s compensation committee refused to ask any question about the award of salaries, perks, annuities, life insurance and rewards to the executive members at a critical point in the life of Enron. Sir Goodwin’s recent pension saga is a recent case in point. It leaves a sour taste in the mouth of all stakeholders to see that ‘simple’ things to be done to salvage ‘huge’ losses or scandals are clearly overlooked may be due to familiarity which breeds contempt, anyway.
The temptation to be ‘bought’ with money is so strong that the idea of independent executive directors serving on a board is not having the impact it was expected to have as they all easily get caught up in the scandal in the long run. All the so-called independent committees, directors, and auditors were there to bring checks and balances yet they failed shareholders.
People were just doing anything they want. Suffice to say that the onus of the matter is that the culture of the organisation should be linked with individual values and channelled to what the organisation is expected to do in its corporate rules and regulations. This could in no doubt go a long way to stamp out the bad nuts from the corporate board rooms.
Enron created partnerships with shell companies or subsidiaries known as special purpose entities (SPEs), enabling them to keep hundreds of millions of dollars in debt off its books, overstate and understate debt due to some very loose accounting rules. The Directors of Next plc on the other hand complied with Company law requiring them to prepare accounts for each financial year which give a true and fair view of the state of affairs of the company and the Group and of the profit or loss of the Group for that period. Who controls the monitor? A lot might have been said and written about this but it is worth commenting that auditors who are meant to control the system (and for that matter the controllers) are human beings. They have conscience and thus someone or somebody could be said to also monitor them and the cycle goes on and on. What is actually needed in my opinion is little honesty, morals and fear of God.
The four-member Next’s audit committee reviews the risk management process and significant risk issues are referred to the Board for consideration; and considers financial reporting and reviews the Group’s accounting policies relating thereto.
It must be said here that in particular, major accounting issues of a subjective nature are discussed by the committee thus zeroing in to the issues relevant to Next not just the IASB’s requirement. This procedure might have helped the position of Next in the long run and could definitely help other companies if they follow those principles.
Furthermore, the first basic rule of investing which was diversification was also breached at Enron. Workers investing pension money in company shares had their savings tied up in Enron’s stock; and there was no plan for workers to diversify those savings and government regulators did virtually nothing. This is irresponsibility on the part of the directors. Workers’ anger was evident when in France, for example some company bosses were held hostage. The G20 demonstrations in London were also other cases in point.
In Next people are considered a key asset to the business. The Board has, therefore, adopted policies aimed at minimising risks in the Group’s activities to ensure that they do not harm employees, customers or the general public, all of whose interests are regarded as critical to business success. Shareholders have an opportunity to ask questions or represent their views at the Annual General Meeting. This is always the norm at Annual General Meetings. But half a loaf is better than none, it is said. Not all the mistakes and loopholes could be plugged overnight but communications should as usual be a two-way affair, continuous and all concerns by stakeholders should be followed and investigated by independent bodies.
Enron and its executives have contributed large sums of money to some politicians. Enron created a culture in which financial instruments was designed to turn profits into losses and taxes into tax shelters. Excessive risk was the word. It was different with Next. It conducts a weekly “Next Brand trading meeting” which considers the performance and development of the Next Brand through its different distribution channels. All business aspects of risk management in respect of the Next Brand including sales, property, product, systems, warehousing and personnel also considered here. Key performance indicators are monitored daily and weekly to help to keep in check all aspects of risk. To Next, risk management was part of their organisational culture.Next’s Board is responsible for the Group’s risk management process. It has delegated responsibility for implementation of the risk management process to the Chief Executive and senior management best qualified in each area of the business. The Board sets guidance on the general level of risk.
Next’s conduct or operations in the board room should be emulated. Corporate governance should be a continuous process and all stakeholders-focused. It should not discriminate and should be regularly reviewed by an external body appointed by shareholders in consultation with the board so that they do not take over the responsibilities of the board.
The Next’s Board takes care not to disseminate information of a share price sensitive nature which is not available to the market as a whole. On the other hand share performance-related pay contributed to Enron’s demise by pushing the executives to announce non-existent profits through the special purpose entities to deceive the market in order to keep its stock price high to enable them receive their fat pay. They paid themselves huge salaries as a result.
This practice is still continuing all over the globe; and was mainly part of the current recession. There is no doubt that Boards of companies should be made to live up to their responsibilities. With Next’s corporate governance, one could see that the main responsibilities lie with the Board. For example, the system of internal control and major policy decisions as well as the Group’s risk management are the responsibilities of the board; who in turn delegates these responsibilities to the CEO and senior management best qualified in each area of the business.
The Board at Next acknowledged that its primary role is to represent and promote the interests of shareholders; is accountable to shareholders for the performance and activities of the Group and communicates with its shareholders in respect of the Group’s business activities through its annual Report and accounts, yearly and half yearly announcements and regular trading updates to the stock exchange. Enron’s board of directors were ‘busy’ trying to mislead tax authorities in order to collect $87m from creating tax shelters. A little over the top maybe, but little drops of water make a mighty ocean. Enron could have avoided all those mess if it had listened, complied and enforced the rules to the letter instead of bending them to suit their whims And caprices. The Business Roundtable emphasised that in planning communications with shareholders and investors, companies should consider never misleading or misinforming shareholders about the corporation’s operations or financial condition. This was lack of business ethics.
Enron appears to be ‘an accident waiting to happen’. Enron’s internal controls had been very weak as a matter of fact. When an employee wrote a memo about the CEO, Ken Lay; he himself handled the matter internally by appointing a law firm which has a long association with Enron to investigate the matter. Auditors, lawyers and independent directors should be seen to be totally independent as outlined in the relevant regulations and laws. They should not be allowed to dabble in the company’s affairs where they have any interest. This must be seen to be enforced.
The main lesson to learn from Enron’s experience is there was no compliance whatsoever with Enron’s operations. Enforcement does not necessarily mean there would be compliance. Enforcement precedes compliance and could be linked together to the success of corporate governance. Enforcement means to compel people to comply with or do something by law or regulation. Unfortunately this had not been the case in most of the corporate scandal cases. No one seemed to enforce the laws and regulations; not the independent directors or the regulators themselves. The significance of this is that compliance to laws and regulations does not come easily without independent directors disciplining themselves to follow the regular review of risk management issues for the company concerned.
Nevertheless, corporate governance could be the hub to the reputation of company and its directors regardless of other equally important issues like corporate social responsibility (CSR) for the reason that it has widely been embraced for its apparent economic health of companies and society in general. Like Total Quality Management, corporate governance should be made company-wide, stakeholder-focused and rated given awards like the ISOs.The ratings should be published regularly. This could benefit all stake holders and bring back the trust shareholders in particular have lost in both executive and non-executive independent directors.
Reference:
1.’In search of Gates’; Fortune, October 4, 2004 pp76
2. Elkind, P; Bethany, M; ‘They’re getting close’, Fortune November 24, 2003 page21
3. Fortune Europe Edition No.24, December 22,2003pp 40
4. Gunther, M; ‘Boards Beware!’ Fortune November 10, 2003 page 80
5.’Inside The Head of BP’ by Nelson D.Schwartz, Fortune, July 2004, page 56
6.’LEADERS: The real Scandal’ the Economist January 19th, 2002 page9
7. Next Annual Report and accounts, January, 2002
8. Sellers, P. “INNOVATION SPECIAL; P&G: Teaching an old dog New Tricks”, Fortune; May 31, 2004 page36, 37, 60-63
9. Taylor III, A., THE AMERICANISATION OF TOYOTA, Fortune, December 8, 2003 pp56
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