Enron Rules Still Apply

The verdict in Houston that convicted Enron's Kenneth Lay and Jeffrey Skilling of gargantuan fraud does not close the subject of corrupt corporations. But it might put a stop to the whining from boardrooms, for a while at least. The jury acted swiftly and with great clarity, brushing aside the "I didn't know" defense of the two executives in favor of guilty, guilty, guilty. Congratulations to the jurors and to the federal prosecutors.

The rapid meltdown of Enron in 2001 became the symbol of an era of financial deceit and eye-popping thievery. Executives like Skilling and Lay, claiming to embody the wonders of a "new economy," instead engineered the wholesale looting of shareholders and, not coincidentally, the destruction of the jobs and lives of bystanders, workers and communities. Families and institutional investors like pension funds lost $6 trillion in the collapse of the stock-market bubble. Scores of corporations were later compelled to "restate" illusory earnings.

How could all this have happened in a financial system that proclaims unrivaled "transparency" and a single-minded devotion to "shareholder value"? The Enron verdict ought to provoke new interest in that question. The short answer, of course, is the political capture of government by the plunderers. That's another reason to change party control in Congress but hardly a guarantee that anything will improve. Leading Democrats are also handmaidens of Wall Street firms and corporate titans.

The enduring scandal is the unfinished business of Enron-inspired reforms--large issues that both political parties danced away from in the aftermath. Indeed, until this verdict arrived, business groups were complaining that the very modest post-Enron reforms are too burdensome and must be rolled back. The looters may well succeed, if the public doesn't speak up sharply.

Authentic reform must first redress the imbalance of power within the governance of corporations--the permissive rules that enable top executives and financial insiders to do whatever they wish with the company, including destroy it. Proposals to permit pension funds and other major institutional investors to nominate independent directors will not produce revolutionary change but should help push managements toward longer-term business strategies. A management voice for employees, even if only advisory, would further enhance the quality of decision-making.

As it is, short-term greed still comes first, especially for CEOs. They're awarded not only fabulous salaries but also piles of stock options that give them a compelling incentive to pump up the stock price--fast--and then get out early, before hapless investors catch on and the share price collapses. If stock options are to continue, companies should be required to distribute them equitably to all within the company, with no more than 5 percent going to top managers. The once-fashionable proposition that incentive-based executive pay aligns top managers with the interests of the company and shareholders is not just bogus but destructive--witness the most recent scandal at Fannie Mae, where execs employed accounting tricks to produce staggering bonuses for themselves.

The other great challenge for reform is to act on what the Enron verdict teaches us: Crime in the corporate suites is committed by people, not by computers or abstract accounting principles. Stealing is stealing. The loose and forgiving standards embedded in corporate law and the criminal codes when applied to business and banking must be tightened and personalized so that individuals given enormous power over other people's money and lives are held personally accountable for their criminal behavior. Lawyers for Lay and Skilling pleaded that the two executives were being prosecuted because their company failed and that capitalism cannot flourish if managers are punished for "mistakes." The jury saw through that flimflam. So should the Congress.

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