Firm’s Fall Led to Change in Conduct
Long before Thursday’s guilty verdicts against Kenneth L. Lay and Jeffrey K. Skilling, the Enron Effect was already changing U.S. corporations.
Houston oil service company Dresser-Rand Group Inc., conscious of the public outrage that followed Enron Corp.’s 2001 collapse, uses its website to wave the flag of corporate good behavior, touting its toughened-up ethics policy. Engineering giant Fluor Corp.’s new code of conduct includes a final section titled “Exceptions” that consists of one word: “None.” And Boeing Co., caught in contracting scandals of its own, now internally publishes examples of company wrongdoing and the punishment meted out to wrongdoers.
These days “you obviously have to be very certain that your compliance procedures are without question,” said Randy Rincella, Dresser-Rand’s general counsel.
The convictions of former Enron leaders Lay and Skilling put an exclamation point on a government crackdown on fraud -- sparked by the energy giant’s stunning 2001 collapse into bankruptcy -- that is having a surprisingly broad effect on corporate behavior.
“Nothing focuses the mind like the knowledge you will be hanged in a fortnight,” said Columbia University securities-law professor John Coffee.
In the years since Enron’s demise, the percentage of the population with a favorable opinion of big business, already slipping for decades, has fallen further.
New laws and regulations have prompted companies to establish stronger ethics policies. Investors are holding publicly traded companies more accountable for their pay practices and board structure.
And, in what may be the most lasting legacy, a sea change in public opinion toward business has made a broad swath of corporate activity fair game for criticism.
Top executives “are really frustrated,” said Stephen Jordan, executive director of the Business Civic Leadership Center at the U.S. Chamber of Commerce. “They feel like business is probably as progressive and as engaged with society as it’s ever been. They’re doing more than ever before, but the demands are still going up.”
To be sure, wrongdoing hasn’t vanished from the executive suite. In 2005, 52% of employees surveyed by the nonprofit Ethics Resource Center said they had seen improper behavior on the job that year, about the same as in years past.
“The percentage of people who are interested in cheating is probably the same as 10,000 years ago,” said Timothy Fort, business ethics professor at George Washington University. “I don’t think there’s any fix for that.”
Meanwhile, stock-based pay for executives has continued to climb to levels unimaginable a decade ago, so that even if the penalties for getting caught are increasing, so is the incentive to cheat.
Recent scandals include a developing probe of companies suspected of backdating grants of stock options to top executives, most of which allegedly occurred years ago.
At the same time, some are complaining to Congress that all the post-Enron scrutiny has become too burdensome, especially for small businesses.
But the crackdown that began with Enron’s downfall has produced concrete results. A White House task force on corporate fraud said Thursday that it had garnered more than 1,000 guilty pleas and convictions since mid-2002, including those of 167 chief executives and corporate presidents.
Among those who have gone from corner office perks to perp walks are John Rigas of Adelphia Communications Corp., Tyco International’s L. Dennis Kozlowski and Bernard J. Ebbers of WorldCom Inc.
Other prosecutions have been, if not smooth, then at least persistent. Martha Stewart was sentenced to 10 months for lying about her sale of ImClone Systems stock. HealthSouth Corp. CEO Richard Scrushy was acquitted of corporate fraud but is under trial on bribery charges, and a third trial may loom for Credit Suisse First Boston IPO banker Frank Quattrone. And the class-action law firm of Milberg Weiss Bershad & Schulman was recently indicted on charges of paying illegal kickbacks to clients.
In addition, many of the sentences have carried more teeth than in the past, thanks to changes in federal sentencing guidelines. Skilling, Lay, Kozlowski and Ebbers could each serve 25 years.
That by itself would have been enough to force some change at the top of the corporate pyramid, experts said. But more pressure has come as the result of public revulsion at the criminal excesses, which in turn prompted the passage of laws establishing new criminal penalties for stock fraud and 2002’s Sarbanes-Oxley Act. That law requires auditors to evaluate the internal controls at companies and increases executive accountability.
Such laws have changed the behavior of both executives and board members, said Linda Trevino, director of the ethics program at Pennsylvania State University’s business school.
Whereas directors in the past earned a year’s pay for a few days’ work, now “people are taking their functions very seriously, especially on the audit and compliance committees,” she said, citing her conversations with directors.
In 2004, federal sentencing guidelines were amended to reward corporate ethics programs that work. Recent studies on what makes ethics programs effective have left little excuse for companies whose plans exist mainly on paper.
At the most basic level, the scandals contributed to overall disapproval of big business.
In October, for the first time in decades, as many people in the U.S. had a generally negative view of corporations as had a positive view, according to a poll by the Pew Research Center for People & the Press. The proportion with a positive view fell to 45% from 73% in 1999.
“This long series of prosecutions has had a tremendous impact on the image of corporations in America,” said Jonathan Howden, a former federal fraud prosecutor now with Thelen Reid & Priest in San Francisco.
As that image has soured, more investors and consumers have begun airing their views and getting organized, said Jordan of the Chamber of Commerce. And the number of shareholder resolutions that passed at companies doubled from 2000 to 2005, according to the Council of Institutional Investors.
