Infectious Greed: Restoring Confidence in Americas Companies

Is Enron's Board Partially to Blame?

It is alleged that members of Enron's management perpetrated a crime and that the company's auditors , Arthur Andersen, let them get away with it. But what about members of Enron's board? They swear that they had no part in it and that they should not be held responsible. ^[30] However, in scrutinizing Enron's board, which was comprised of 15 members, it is obvious that the board epitomized the notion of being captive to their CEO, which in and of itself suggests one possible problem. Indeed, in many instances of dependence on the CEO, one wonders if a quid pro quo didn't occur.

Board member John Wakeham is a Conservative Party politician from Britain. He had approved the building of an Enron power plant in Britain in 1990, and four years later he was on Enron's board. Director Herbert Winokur is chairman and CEO of Capricorn Holdings. He also sat on the board of National Tank Co., which sold equipment and services to Enron divisions for millions of dollars. Former Enron directors Charles LeMaistre and John Mendelsohn were the former president and current president, respectively, of the M.D. Anderson Cancer Center, which received more than $500 million from Enron and its chairman, Kenneth Lay, during a five-year period. Director Wendy Gramm is a former chairwoman of the Commodity Futures Trading Commission. Before she joined the Enron board, she backed several policies that benefited Enron and other energy trading companies. She also heads a program at George Mason University, which received a total of $50,000 from Enron since 1996. Her husband, Senator Phil Gramm, is a major recipient of Enron campaign donations. Board member Robert Belfer is founder and former chairman and CEO of Belco Oil and Gas Corp. Belco and Enron had numerous financial arrangements. Director Charles Walker is a tax lobbyist. Firms partly owned by Walker were paid more than $70,000 for consulting services from Enron. In addition, Enron also made donations to a nonprofit corporation chaired by Walker.

Would a board like Enron's really challenge management? A Senate report argues that the board failed in its fiduciary duties to represent shareholders, and its failure was partly due to the lack of independence. ^[31] In other words, Enron directors knew enough of what was going on, but they did nothing about it. However, as one Enron director put it, this was only a " part-time job," and the directors did the best they could, so they shouldn't be "criticized for failing to address or remedy problems that have been concealed ." The Senate report finds otherwise . Even in 1999, Enron board members were told by the company's auditors that they were using accounting practices that "push limits" and were "at the edge" of what was acceptable. One of the directors, Robert Jaedicke, used to be an accounting professor at Stanford University. Also, the board knowingly allowed Enron to move more than half of its assets off the balance sheet. Governance experts used by the Senate investigation state that this activity is unheard of, yet only one Enron board member expressed any concern with it when it was occurring. The board even waived a code of conduct stipulation for Chief Financial Officer Andrew Fastow, allowing him to create private offshore partnerships that would transact with Enron. These partnerships are detailed in the next chapter. Under the Enron code of conduct, no employee is allowed to obtain financial gain from an entity that did business with Enron. Under Fastow's watch, these entities profited at Enron's expense, but the board idly sat by ”despite Fastow's obvious conflict of interest.

The Senate report concludes that the board missed a dozen red flags that should have warned it about possible shenanigans at the firm. For example, it was told that in a six-month period, Fastow's partnerships had generated $2 billion in funds for Enron. While it doesn't appear that Enron's board was involved in any of the fraud, it should have put a stop to it. ^[32] After all, board members were being paid more than $350,000 a year in salary, stocks, and stock options by Enron to be its directors. The Senate report's conclusion states that "much that was wrong with Enron was known to the Board . By failing to provide sufficient oversight and restraint to stop management excess, the Enron Board contributed to the company's collapse and bears a share of the responsibility for it." It could be that the board members were too well paid by Enron. That is, they might not have wanted the gravy train to end. Their $350,000 a year salary was more than twice the average board compensation in the 200 largest public firms. In addition, some members received additional pay as " consultants " to the firm. Board member John Wakeham was paid an additional $6,000 per month as a retainer for consulting. In 2000, John Urquhart received $494,914 for consulting. ^[33] Such high compensation probably made the board members less likely to challenge Kenneth Lay and other Enron executives.