Memories of Enron
Lawmakers are pushing for a Wall Street overhaul. But nothing will come of it, if history is anything to go by, argues Enron whistleblower Sherron Watkins.
Remember Enron? Remember the 24-year prison sentence that was meant to discourage similar corporate malfeasance?
Well, this past week, Jeff Skilling, Enron's former CEO and my former boss—who was convicted and sentenced to more than two decades behind bars in 2006— won a partial victory in an appeal before the U.S. Supreme Court.
The appeal, however, is not likely to spring Skilling from his prison cell in Colorado. Even if he gets some convictions tossed, federal sentencing guidelines will probably keep him behind bars for at least another decade, given the size of Enron's multibillion-dollar financial collapse.
Enron was Ebola in a Petri dish, and instead of stamping out the virus, we let it fester.
But the appeal—and recent financial-reform push—has set me thinking, once again, about how we deter the next generation of corporate miscreants, especially now that a new financial-reform bill is making its way through Congress.
By now, after the fallout from executive overreach/malfeasance/gambling at Bear Stearns, Merrill Lynch, Lehman Brothers, Goldman Sachs, and AIG—even after Skilling—it is clear that lengthy prison sentences do not do the trick. The convictions of the Enron CEO and other executives from our scandal-plagued start of the century have, ultimately, been ineffective warnings to the corporate daredevils, and, later, bailout recipients.
At the heart of Enron's meltdown, and the recent Wall Street collapses, is a single issue: compensation systems run amok.
In the case of Skilling, the U.S. Supreme Court rejected the prosecution's use of an anti-fraud law known as "theft of honest services" and sent his case back to the appellate court to consider the impact on his multiple convictions.
"The government charges Skilling with conspiring to defraud Enron's shareholders by misrepresenting the company's fiscal health to his own profit, but the government never alleged that he solicited or accepted side payments from a third party in exchange for making these misrepresentations," the high court said in its recent ruling.
My question to the government is this: What constitutes a modern-day bribe or kickback? Is a perpetrator off the hook because he or she uses the market to pay the kickback?
In 1993, Congress passed a law disallowing tax deductions for compensation in excess of $1 million. This new law was an attempt at reining in CEO pay; instead, it fueled the use of stock options to compensate executives for the loss of their salary above $1 million.
As COO and then CEO, Jeff Skilling was both contractor, builder, and owner of various stock-option and stock-grant plans put in place for his benefit as well as other Enron executives and employees. In the U.S. government's indictment of Skilling, he was accused of hiding Enron's true financial condition in the years 1998 through 2001 by using various means to fill the "gap" between actual results and budgeted goals, all the while benefiting from this deception by selling stock and options in the marketplace that netted him more than $89 million in profit.
Sound familiar to those reading the Lehman Brothers' Bankruptcy Examiner's reports?
In 2002, in the wake of the collapses of Enron, WorldCom, Adelphia, HealthSouth, and others, Congress again focused on the issue of compensation and the use of stock options.
In congressional testimony to the Committee on Financial Services, Paul Volcker said this as early as June 2003: "I think it is clear that the grotesque escalation of executive pay over recent years has been importantly a function of the greatly expanded use of fixed-price stock options for a small group of senior executives," he said. "That development has been encouraged and defended by the theory that such options align the interests of managers and owners… Experience provides ample evidence that the relationship between reward and performance is capricious."
The business world erupted in protest at any legislative inquiry into compensation practices, and Congress eventually settled for the Sarbanes-Oxley Act, an overhaul bill focused primarily on accounting. Given the enormity of the Wall Street collapses of 2008, it would appear Sarbanes-Oxley was ineffective.
And sadly, current financial reform does not get to the root of the problem, either.
The fix is simple, but not pain-free: Repeal the 1993 law and allow corporations to deduct all corporate salaries, even those above $1 million. Then require CEO compensation to be all cash—no stock options. Eliminating the use of stock options for the CEO and the C-class executives solves the problem.
In terms of Enron, the story is over. Skilling's plight and fight are of little interest; he's been in prison for the last 3.5 years, with many more to follow. He's paying for his crimes with his freedom and his money. He destroyed $60 billion of shareholder capital, wrecked the lives of thousands of Enron employees, and, in some cases, indirectly caused untimely deaths. Even if he prevails at the appellate court and is released, his life's work will be considered a failure, and so will he.
More importantly—and depressingly—than the individual fate of Skilling is the fact that, seemingly, we've learned nothing from the rash of corporate scandals from Enron and onward.
Enron was Ebola in a Petri dish, and, instead of stamping out the virus, we let it fester.
Why hasn't Congress had the courage to address compensation abuse head-on? We've had abusive corporate practices in our past that were successfully addressed by Congress; such as monopoly abuse, child labor, environmental pollution, and worker safety.
The trouble with compensation abuse is that we—as a society—are envious first, and only outraged later, when we hear the story of yet another lucky executive who bankrupts a company, and walks out the door with multiple millions in his pocket.
Sherron Watkins is the former vice president of Enron Corp. who alerted then-CEO Ken Lay in August 2001 to accounting irregularities within the company. Time magazine named her as one of their 2002 Persons of the Year. Watkins is co-author with Mimi Swartz of Power Failure: The Inside Story of the Collapse of Enron.