The Hindu Business Line : Learning from Enron

The recent conviction of two former CEOs of Enron is widely interpreted as a verdict on the corporate excesses era of the 1990s, when many a big company was accused of large-scale financial skulduggery. A common strand in the shenanigans that ultimately brought down once-iconic companies — for instance, Tyco, WorldCom, Adelphia and HealthSouth, besides Enron — was the collusion of the senior management.

As with some of the earlier high-profile cases, the Enron verdict is especially severe on the top management, holding it responsible for the collapse, or at least the forced restructuring of companies in its charge. The two former Enron CEOs, who were accused of wire and securities fraud and conspiracy, were not successful in shifting the blame to lower level officials, while they themselves feigned ignorance about the goings-on. That included in Enron's case some complex accounting, which created structures outside the balance-sheet, allowing some executives to siphon off funds. Thus, the verdict holds the two CEOs accountable, as much, if not more, for the sensational collapse in 2001 of Enron as for the specific misdeeds they were charged with — deliberately misleading investors, regulators and their employees even as they were aware of the melting core.

The Enron verdict probably stands out in a long list of similar judgements only because of the sensational plunge of America's most admired company to bankruptcy. Almost $60 billion in market capitalisation was wiped out. Around 5,600 lost their jobs and many were devastated as their pension corpus, invested in the Enron stock, evaporated. Post the Enron fiasco, corporate governance standards and regulatory oversight have been considerably spruced up not only in the US but elsewhere too, including in India. The US Congress passed the Sarbanes-Oxley Act that makes members of top managements personally accountable for misdeeds. In India, where the debate over governance has been on for a while, a major development has been the adoption of the new Clause 49 of the Listing Agreement. Publicly quoted companies are now required to broadbase their boards with independent members and all directors will be held accountable in certain cases.

Yet, nobody is betting that corporate excesses will not recur. That is because some of the factors that influenced the misadventures remain. As pointed out in the Enron case, it was the need to please the stock market even at the cost of compromising the company's integrity and solvency, that led the top management to indulge in financial recklessness. Such traits are more likely to be present at a time of ever-rising stock prices. Though far less documented, even mainstream Indian companies face extraordinary pressures to deliver in stock market terms, quarter after quarter.

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