Enron Case Corporate Governance

7/28/2019 Enron Case Corporate Governance

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Corporate Governance: ENRON Case

Auditors and Analysts who are external to the company and the Board of Directors who areinternal to the company have failed in discharging their duties.

Five issues have been identified: Chairman & CEO Audit Committee Independence and Conflict of Interest Flow of Information Too many directorships

Chairman and CEO:

In Enron, Kenneth Lay was both Chairman & CEO. For a brief while the two positions wereseparated when Jeff Skilling functioned as CEO and when he resigned in August 2001, Lay

again took both roles.

Mr. Lay claimed that he did not know too much of details of accounting fabrication that wasgoing on.

For Lay and former CEO Jeffrey Skilling and former top accountant Richard Causeyconsequences of conviction are dire.

Independence and Conflict of Interests: Good governance requires that outside directors maintain their independence and do not

take any benefit from their board membership except remuneration. Otherwise it can create

conflicts of interests. Enron had majority of directors who were independent but they

compromised their independence. Six of 14 outside directors suffered conflict of interests.

Conflict of Interest:

Herbert S Winokur, is also Director of the Natco group which is a supplier to Enron and itssubsidiaries. He is also the Chairman of the Boards Finance Committee which recommended

that the Board suspend the companys ethics code. The involvement of these directors

receiving other benefits compromised their independence making one wonder whether they

acted in the best interest of Enron.


John Mendelsohn was the President of MD Cancer centre at the university of Texas. Enronand related entities donated $1.5mn (Rs. 7.2 Crores) to the centre since 1985.


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William Powers, who also headed special investigation team, was the Dean of Texas lawschool. Enron had given $3 million (Rs. 14.4 crores) to the university since he became Dean.

The law firm that works for Enron, Vinson & Elkins, has endowed a chair at the law school.


Robert Belfer, Chairman of Belfer Management bought a stake in energy company from anEnron partnership thereby providing funds to start another.

Wendy Gramm (spouse of Republican Senator) was formerly the Chairman of commoditiesFutures Trading Commission of the Federal Govt. Enrons trading in energy derivatives was

exempt from regulation of CFTC. Shortly after that decision, she quit the commission and

joined the Enrons Board. He is presently Director of Regulatory Studies Programme at

George Mason University. Enron donated $50,000 (Rs 24 Lacs) to that centre.

Conflict of Interests:

Lord John Wakeham, a former Minister for Energy in U.K. was paid $7200 (Rs. 34.5 lakh forservices as a consultant to Enrons European Unit. When he was minister, he gave consent

for building the countrys largest power plant at Teeside.

Too many Directorship:

Being a Director, needs time and efforts. Although a Board might meet only four or fivetimes a year, the director needs to have time to read and reflect overall material provided to

and make informed decisions.

Good governance suggests that an individual sitting on too many boards will not have timeto do a good job.

Raymond Troubh, one of the director holds directorship of 11 companies.Audit Committee: The Board works through sub committees and audit committee is one of them. It

not only oversees the work of the auditors but is also expected to independently inquire into the

workings of the organization and bring lapses to the attention of full board. The Enron audit

committee failed in this regard.

Prof. Robert Jaedicke, a former accounting professor and Dean of Stanford UniversityBusiness School, was Chairman of Audit Committee. Jaedicke, in addition to not performing

his role as Chairman of Audit Committee, seconded the motion in the board to suspend the

code of ethics of the company in order to allow an employee to set up special partnership.

Setting up that entity amounted to a conflict of interest and was specifically prohibited by

the company code.

Apart from Jaedicke, the Audit Committee comprised of five persons three of whom residedoutside the country.


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An Audit Committee is almost a working committee and needs to meet more frequentlythan a full board. Having non-residents on the committee hampered its functioning. One of

the members, Ronnie Chan missed 75% of the meetings in 2001.

Flow of Information: Board is expected to take informed decisions for which it needsimportant information in a timely manner.

In case of Enron directors are pleading ignorance of the murky deals as way of excusingthemselves of the liability.

The special investigation committee report says: The Board was denied important information that might have led it to action, but the Board

also did not fully appreciate the significance of some of the specific information that came

before it.

If they did not have sufficient information, they should have gone seeking for it. Report suggests that Enron operated about 3500 special purpose Entities, that is,

partnership that shifted debt and losses of Enrons balance sheet.

If the directors did not understand what was being reported to them, it was their job toeducate themselves more about it by asking the right questions and getting more

information. This, they failed to do.

Documents

Enron Case Corporate Governance