The pivotal lessons from the Enron debacle do not stem from any criminal wrongdoing. Most of the maneuvers leading to Enron’s meltdown are not only legal, they are widely practiced. Many of the problems dramatically revealed by the Enron scandal are woven tightly into the fabric of American business. Outside the spotlight on Enron’s rise and fall, government policies and accounting practices continue to reward and shelter many firms with harmful habits just like those of Enron. We’ve ranked the 100 worst companies for each habit and awarded “Ennys” for outstanding Enron-like performance. We’ve also given a Lifetime Achievement Award to the corporation with the highest combined score for Enron-like performance in all ten categories (a hint: Enron placed second).
The Ten Habits of Highly Defective Corporations
HABIT 1: Tie employee retirement funds heavily to company stock and let misled employees take the fall when the stock tanks–while executives diversify their holdings and cash out before bad news goes public. Winner: Coca-Cola.
Once upon a time the upward slope of Coca-Cola’s stock price was as smooth as a cold Coke on a warm afternoon. Over the past couple of years, however, the venerable soft drink maker’s stock fizzled like New Coke. Employees saw their 401(k) retirement assets evaporate, with the stock down more than 31 percent in the three years ending November 2001. Eighty-one percent of Coke’s 401(k) was invested in company stock. Not all employees fared poorly. Former CEO M. Douglas Ivester left Coke under a cloud of controversy but received a severance package valued at more than $17 million; it included maintenance of his home security system and payment of his country club dues.
HABIT 2: Excessively compensate executives. Winner: Citigroup.
CEO Sanford Weill took home more than $482 million between 1998 and 2000. In 2001 he made another $42 million. Weill’s stock compensation plan was amazingly equipped with a “reload” feature: Each time Weill cashed in his options, he automatically received new options to replace them. Imagine if Citigroup customers had a reload ATM machine that automatically added replacement money to their accounts after withdrawals! While throwing money at its executives, Citigroup rips off low-income Americans with predatory lending practices. The Federal Trade Commission has brought suit against Citigroup, alleging abusive lending practices; if all charges are proven, Citigroup’s liabilities could reach $500 million.
HABIT 3: Lay off employees to reduce costs and distract from management mistakes. Increase executive pay for implementing this cost-cutting strategy. Winner: Lucent Technologies.
Last year Lucent axed at least 42,000 jobs. While these layoffs occurred during the tech-industry tumble, Wall Street critics lay much of the responsibility for Lucent’s misfortune at management’s door. Lucent was the only company to end up on both the Fortune and Chief Executive 2001 “worst boards of directors” list. Though the board took action and fired CEO Richard McGinn in October 2000, it gave him a golden parachute of more than $12 million as a parting gift.
HABIT 4: Stack the board with insiders and friends who will support lavish compensation and not ask difficult questions about the business. Winner: EMC Corporation.
Only two years ago this leading producer of computer storage media could have held Thanksgiving dinner in its boardroom: The chairman, Richard Egan, his wife and son all sat on EMC’s board. As a member of the board Junior got to help set Dad’s allowance (and help determine his own inheritance). How many kids wouldn’t love that? Of course, Dad might not have needed much help, since he also sat on EMC’s compensation committee, which determined his and other executives’ pay. Since winning this award, EMC has added an independent director to its board.
HABIT 5: Pay board members excessively for their part-time service; pay them heavily in stock so they have a disincentive to blow the whistle on bad business practices that keep the stock price up. Winner: AOL Time Warner.
AOL Time Warner is one of a growing number of companies to compensate directors solely in stock options. In 2000, according to an Investor Responsibility Research Center study, the potential value of these stock options (using SEC-specified formulas for computing the present value) was $843,200 per director–not bad for a part-time job. Each member of AOL Time Warner’s board is annually granted 40,000 stock options. Directors make money for each dollar increase in the stock price. If AOL Time Warner’s stock price rose $10 a share, the options would gain $400,000 in value.
HABIT 6: Give your independent auditor generous non-audit consultant work, creating conflicts of interest for those charged with assuring that the company follows the rules and protects shareholder interests. Winner: Raytheon.
When it comes to shooting down auditor independence, military giant Raytheon is a proven winner. According to an IRRC study, in 2000 Raytheon had the highest percentage of non-audit fees for companies with revenue of more than $20 billion. Raytheon paid just $3 million to PricewaterhouseCoopers for audit services and an additional $48 million for consulting services. That Raytheon’s independent auditor receives such large non-audit fees creates a substantial conflict of interest and continues a pattern of board and management disregard for shareholder interests.
HABIT 7: Give campaign contributions to gain access to decision-makers; diversify your political investments in a portfolio of candidates from both major parties. Winner: Financial Services Industry. Accepting for the group, Citigroup and MBNA.
After heavy lobbying and campaign contributions from the banking and credit card industry, Congress passed the Bankruptcy Reform Act in 2001 by wide margins. Credit-card giants Citigroup and MBNA were among the largest campaign contributors during the 2000-02 period. On the very day the House voted on the bankruptcy bill, MBNA contributed $200,000 to the National Republican Senatorial Committee, according to a Time exposé. If it becomes law, the bill will make filing for personal bankruptcy considerably more difficult; it will also put credit-card companies in a more favorable position, allowing them equal standing to claims for child support, for example.
HABIT 8: Lobby lawmakers and regulators to eliminate pesky oversight, safety, environmental and other rules, and pass favorable regulations, subsidies, tax breaks and other items on the company wish list. Winner: Boeing.
Using its famed stealth technology in Congress, Boeing circumvented military procurement practices when the Secretary of the Air Force directly submitted a controversial contract under which the Air Force would lease 100 large tanker aircraft from Boeing. Senator John McCain challenged both the process and the terms of the deal, which he said would cause the government to pay much more for the lease than if it purchased the planes outright. He added, “It’s pork, and we shouldn’t be paying for it.” Boeing has paid for plenty of pork and prime rib, as the nation’s fifth-largest lobbyist over the three years ending in 1999.
HABIT 9: Get the government to finance and insure dubious overseas investments, especially those opposed by the local citizenry. Winner: Halliburton.
While Vice President Dick Cheney was CEO of Halliburton, a leading global energy services and engineering/construction company, Halliburton received $1.5 billion in government financing and loan guarantees, a fifteenfold increase from the pre-Cheney days. The company also garnered $2.3 billion in direct government contracts, more than double the amount received in the five years preceding Cheney’s half-decade tenure. Over the 1992-2000 period, in which Enron received $7.2 billion in government financing and loan guarantees, Halliburton was close behind at $6 billion. Not surprisingly, Halliburton doubled both its campaign finance and lobbying expenditures, to $1.2 million and $600,000 respectively, during Cheney’s tenure.
Habit 10: Avoid taxes. Use tax deductions, credits and clever accounting to pay little or no tax, and hopefully even get tax rebates. Winner: WorldCom.
When you send or receive e-mail from an AOL account, fly on a commercial airliner or make long-distance calls on MCI, you are consuming services provided by WorldCom, the nation’s largest operator of fiber-optics networks. WorldCom–now in serious financial trouble–has grown over the years through a series of dramatic acquisitions. These acquisitions, and the write-offs associated with them, are the principal force behind WorldCom’s tax avoidance Enny. Though the company reported net income of $3.5 billion between 1996 and 1998, it received a tax rebate of $112.6 million. Another piece of the $1.3 billion of tax breaks WorldCom enjoyed over the three-year period came from stock options. Stock option deductions shaved $265 million off WorldCom’s tax bill between 1996 and 1998.
Lifetime Achievement: General Electric
No company demonstrated greater leadership in “Bringing 10 Bad Habits to Life” than General Electric.
§ Between 1995 and 2000 (the last full year of Jack Welch’s employment as CEO at GE), Welch ranked in the lowest 10 percent of CEOs for delivering shareholder returns commensurate with his pay level, according to BusinessWeek.
§ General Electric is the largest US company to lack an independent board.
§ Seventy-seven percent of GE’s 401(k) was invested in General Electric stock as of November 2001.
§ In 2000 GE paid its independent auditor three times as much for non-audit work as it did for audit-oriented fees.
§ In 2000 GE’s non-employee directors received average pay of $430,300. Meanwhile, many GE veterans no longer get a paycheck: Between 1981 and 2001, GE’s US work force shrank more than 45 percent, from 285,000 to 158,000.
§ For the two years ending in 1999 GE spent $23.4 million on lobbying activities, ranking tenth among large companies. The lobbying paid off: GE received $806 million in Export-Import Bank loans and loan guarantees between 1998 and 2001. And between 1996 and 1998, GE got $6.9 billion in tax breaks.