The Lessons of the Enron Debacle
The fall of Enron, and its subsequent bankruptcy, may well be the largest scandal in the history of American business and politics. If we ask, "What went wrong with Enron?" the answer would be, "Everything."
Enron's rise from a small Texas gas company to the seventh largest American corporation was spurred, at every juncture, by political influence and political decisions. Whether they were changes in government policy, loosening of federal regulations, staffing of key positions which supported or monitored energy issues: The government of the United States and the state government of Texas, looked out for Enron's interests. Even when state and national interests, and the interests of consumers and taxpayers and workers, was being undermined.
Enron has given $1.9 million in soft money to the national political parties, more than three quarters of it to the Republicans. It has spent additional millions on political candidates, so that two-thirds of our national legislators have benefited from Enron largesse to their campaigns.
In particular, Enron president Kenneth Lay has been generous - profligate - with his political contributions. His most intimate and costly connection was with the Bush family. Lay was the co-chairman of President Bush's re-election campaign in 1992 and chairman of the Republican national convention in that year. He supported the gubernatorial and presidential campaigns of George W. Bush from the start. The largest donor to the current President's political career, Lay and Enron have given George W. Bush $575,000 in political money. What has this money meant?
Money buys access. Kenneth Lay has had easy access to James Baker, President Reagan's chief of staff; to Vice-President and later President George Bush; to Governor and later President George W. Bush; and of course to Vice President Dick Cheney. When Enron's 100-plus person lobbying staff in Washington couldn't get what they wanted, they called in Kenneth Lay. He had private meetings with Cheney to tell him what the nation's energy policy should be; he submitted a list of names of who should be appointed to the Federal Energy Regulatory Commission. The current chair, Pat Wood, was Mr. Lay's choice.
It is time for that to change. In a democracy, every vote should count, not just the votes of those who make big campaign contributions. The time has come to institute campaign finance reform. The first step in cleaning up our political system is for the House to pass the Shays-Meehan legislation, which would ban soft money contributions to political campaigns. Substantially similar to the McCain-Feingold legislation that has already passed the Senate, its passage would put on President Bush's desk a major reform he would have to sign, no matter how much he opposes it (and he opposes it mightily).
That is the first lesson of Enron's demise: we must take the big money influence out of politics and return the country to the people.
The second lesson from the Enron debacle is that the United States must reconsider the thoughtless rush to deregulate everything. Enron got into the difficulties it did - and held California ratepayers hostage in the process, and then later undermined banks and pension funds - because deregulation and the loosening of regulations had devastating results. The simple truth is, there are many times when only the government protects the rights of citizens against predatory, greedy and unscrupulous practices in the marketplace. Without oversight and regulation, workers, consumers, taxpayers, and stockholders can be victimized by unethical and the dishonest individuals and corporations.
Enron pressed from deregulation of gas and electricity not because it was good for the country, but because it was good for Enron's profits. All one has to do is ask the people of California, who saw electric rates double and more this past summer, whether deregulation was in the people's interests.
A third lesson is similar: Various professions must reconsider the rapid rush to loosen the structures that keep their professions honest. In this regard, the most important of these professions are investment banking, accounting, and law.
Enron and other corporations have created new financial instruments, called derivatives, in which companies buy and sell not just future products, but future profits. Futures contracts in such things as wheat and pork were intended to bring price stability to farmers; futures and other derivatives have turned into gambling opportunities in which speculators can win big and lose big, all the while holding the public hostage to their trading frenzies. Enron was the national, and world, leader in creating new kinds of derivatives, in creating new investment markets. As we all have seen, Enron brought not stability but catastrophe to the financial markets.
Enron engaged in dishonest accounting practices; from the most recent reports, there is fear that other companies may have followed a similar path. This fraudulent bookkeeping was the result of what is called 'aggressive accounting,' which is what happens when the accountant wants to make a company look good instead of trying to make sure figures are honest and straightforward. Outside accountants - the firm of Arthur Anderson - who were supposed to certify that Enron's figures were honest and reliable, collaborated in the fraudulent accounting. Pension funds, individual investments, the stock market as a whole: All will take a long time to recover from the accountants who bent the rules of accounting to create and 'certify' Enron's dishonest financial statements.
Enron's law firm wrote up special contracts that skirted legality. Then, when charges surfaced that these contracts were irregular and less than honest, the same firm saw no conflict of interest in reviewing the contracts and procedures and saying that they were perfectly acceptable.
What should be done? First, since the investment bankers and brokers cannot police themselves, the Securities and Exchange Commission should play a more active role in protecting the integrity of markets. Second, since accounting firms collaborate with aggressive and downright dishonest accounting, the federal government should pass legislation making accounting firms responsible for damages if their accounting does not create a transparent view of the actual balance sheet of corporations. Third, law firms that conspire with fraudulent corporate practices should likewise be made responsible for damages to those victimized by the fraud.
A fourth lesson is that we must not privatize Social Security. The thousands of workers and retirees who saw their pensions go up in smoke are ample warning that the central function of pensions should be to provide a secure stream of income to those who no longer work. Soaring stock prices look good from afar, but when it one's entire future slips down the drain with a huge sucking sound, price mobility no longer seems desirable. Just ask Enron employees.
A fifth lesson is that the relentless pursuit of profits, without regard for social values or economic fundamentals, is a cancer on our economy. Like cancer, it favors out-of-control growth, a growth that undermines the health of the individual body in one case and of the economic body of society in the other. Let us consider what Enron did wrong in its business 'model':
- It shifted from producing and transporting gas to trading paper, thus moving from making things to manipulating figures
- It put executive benefits ahead of worker's benefits - and shareholders' rights
- It cooked the books: Management lied about corporate debt, moving it to shell corporations so that Enron's profits and valuation could be inflated falsely
- Its executives made their personal enrichment the highest priority of the corporation
What should be done to correct this relentless pursuit of profits? First, a windfall profits tax would do wonders, returning to society some of the profits of those who speculate rather than create new goods and services. Second, as even President Bush now recognizes, there must be limitations on the actions of corporate executives, and not just in the area of restraining them from selling stock when employee retirement funds cannot do so. In the light of Enron executives' conflicts of interest, and massive avoidance of fiduciary responsibility to shareholders, we need new legislation holding management accountable, legislation establishing both civil and criminal liability for managerial malfeasance.
Many of Enron's excesses could have been curbed if corporations were required to treat stock options as executive compensation, making them itemizable on balance sheets as the cost they are, and making those benefits taxable. Additionally, regulations concerning subsidiaries and corporate spin-offs should be amended so that they the relations between parent and subsidiary are transparent and reflect the actual ownership position of the parent company.
A sixth lesson is that we have privileged CEOs over workers for too long. The Enron tragedy, in which top executives were making tens of millions while workers were losing both their jobs and their pensions, is an outgrowth of American economic values, which see nothing wrong in CEO's making close to 500 times what their employees earn. One way to redress this imbalance would be to tax those in the very highest tax bracket -those in the top 1 percent - at a higher rate. Unhappily, President Bush and the Republicans have just done the opposite, giving the majority of tax breaks to the wealthiest one percent, encouraging greed by rewarding it. But if the nation has the will - and if the Democrats in Congress have the courage - Bush tax breaks can be rescinded. In fact, having done that there is another step to be taken: Congress can raise the marginal rate on those who earn more than $300,000 a year. That the federal government can pay for guns and butter, and secure Social Security in the process.
If we learn these six lessons, changing our laws, regulations and policies as a consequence, Enron may turn out to have been a blessing in disguise. If we don't learn, there are many more Enrons in our future.
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