Enron's Board Was Compromised by Financial Ties (Update1)
By Mark Jaffe
New York, Nov. 29 (Bloomberg) -- Enron Corp. plunged from the largest energy trader to the verge of bankruptcy under a board of directors whose independence was undercut by financial ties to management, according to corporate governance experts.
Enron gave seven of its 14 directors consulting contracts, sales to their business or donations to their non-profit institutions, according to company and public records. The recipients include three members of Enron's audit committee, which is responsible for financial oversight.
Lord John Wakeham, for example, a former leader of the British House of Commons, sits on the audit committee. Enron gave him a $72,000-a-year consulting contract. John Mendelsohn, president of the MD Anderson Cancer Center in Houston, is also on the audit committee. In the last five years Enron and its chairman Kenneth Lay have donated $567,900 to the cancer center.
``To get on a board you have to be `clubbable,' but this looks like collegiality turning to cronyism,'' said Allan Cleveland, counsel to the New Hampshire Retirement System, an Enron shareholder.
Enron, based in Houston, Texas handled almost a quarter of all natural gas and electricity trades. During the past seven weeks, its board has presided over a $26 billion drop in market value that began after the company wrote down $1.2 billion in shareholder equity and reported it had overstated earnings by $586 million since 1997.
As Enron's shares fell, the company suffered a cash crunch. It sought an infusion of capital and agreed to be acquired by Dynegy Inc., a Houston-based rival. That plan collapsed yesterday as investors balked at investing $1.5 billion, prompting Dynegy to withdraw its offer. Enron shares closed at 61 cents.
Responsibility
Corporate boards are responsible for protecting shareholder interests by reviewing the work of top executives. To accomplish that, two-thirds of a board should be ``independent'' from management, according to the Council of Institutional Investors, which represents pension funds.
The council defines an independent director as ``a person whose directorship constitutes his or her only connection to the corporation.''
``Consulting contracts, donations to non-profit organizations linked to directors, this eats away at independence,'' said Ann Yergen, the council's director of research.
Corporate governance standards established by the New York and NASDAQ Stock Exchanges say all audit committee members should be independent.
Enron board members, including Wakeham and Mendelsohn, declined repeated requests for interviews. Vance Meyer, a company spokesman, said Enron could not immediately respond to questions regarding the board.
Compensation
Enron's board met nine times in 2000 with each member receiving annual compensation of $79,000 in cash and stock. Every member attended at least 75 percent of the meetings, except Ronnie Chan, chief executive of the Hang Lung Group, a Hong Kong development business, according to company filings.
Based on Enron proxy statements and other documents, the following relationships existed between Enron and board members:
-- Herbert S. Winokur Jr., 57, is the managing partner of Capricorn Investors L.P., a holding company that owns the Natco Group Inc., a maker of oil and gas production equipment. An Enron board member since 1985, Winokur serves on the executive committee, chairs the finance committee and was appointed to a special committee created to look into how Enron was managed.
In 2000, Natco had $370,294 in sales to Enron subsidiaries, or about 1.6 percent of Natco's total sales.
`Compromising'
``We think that anything over 1 percent is compromising,'' said Yergen of the Council of Institutional Investors.
Enron said in a proxy statement it believes the terms of the sales were ``no less favorable than the terms of similar arrangements with third parties.''
-- Robert A. Belfer, 65, has been on the board since 1983 and sits on the executive committee. He is Enron's largest individual shareholder with 8.5 million shares, and is chairman and chief executive of Belco Oil & Gas Corp., which operates from an office overlooking New York's Central Park. In 2000, Belco had $32 million in trade settlements and $1 million in option premiums with Enron Trade Resources Corp., an Enron subsidiary.
-- John Urquhart, 72, a former General Electric Co. executive, sat on the board until last May. He received an annual consulting fee from Enron of almost $200,000 a year as a special adviser to the Enron chairman.
-- Mendelsohn, 64, is a physician who was formerly head of medicine at Memorial Sloan-Kettering Cancer Center in New York. He pioneered research in controlling cancer through the chemistry of a tumor's growth and was on President George W. Bush's short list to head the National Institutes of Health. Since 1996, Mendelsohn has been president of the MD Anderson Cancer Center, part of the University of Texas health system.
Donations
Mendelsohn joined Enron's board in 1999. Enron has donated $221,650 to the cancer center. Lay and a foundation he established with his wife, the Linda and Ken Lay Family Foundation, have donated $346,250 in the last five years. The Enron Foundation pledged $1.5 million for a new clinic.
-- Charles LeMaistre, 77, headed the Andersen Cancer Center for 18 years until retiring in 1996. He has been an Enron board member for 16 years, is a member of the executive committee and chairs the compensation committee. That panel awarded Lay a $20 million-a-year severance package that he renounced two weeks ago.
-- Wendy Gramm, 56, has held positions at the Federal Trade Commission and the U.S. Office of Management and Budget and was chairman of the U.S. Commodity Futures Trading Commission. She is director of regulatory studies at the Mercatus Center of George Mason University in Fairfax, Virginia. She is married to Texas Republican Senator Phil Gramm.
In the last three years, Enron and the Ken and Linda Lay Family Foundation have donated more than $50,000 to the university and the Mercatus Center, according to university records.
Consulting Fee
-- Wakeham, 68, a charted accountant and self-made millionaire, became a force in the government of former U.K. Prime Minister Margaret Thatcher where he was known as her ``Mr. Fix- it.'' He was the target of an Irish Republican Army bomb in 1984 that killed his wife and left him buried under rubble for seven hours.
Enron pays Wakeham $6,000 a month to advise the company on European business.
Enron's audit committee poses particular problems, according to corporate governance experts. The committee is composed of Wakeham, Mendelsohn, Gramm, Chan, Robert Jaedicke, a retired Stanford University Business School dean, and Paulo Ferraz Pereira, a Brazilian banker.
Wakeham, Gramm and Mendelsohn are not independent, according to corporate governance experts and standards.
``For the audit committee, you don't even want the appearance of a conflict,'' said Charles Drott, a forensic accountant who has testified as an expert witness in bankruptcy and business fraud cases involving companies such as DeLorean Motor Co. and Lincoln Savings and Loan Association.
The committee is spread across the globe, with Wakeham in London, Ferraz in Rio de Janeiro and Chan in Hong Kong.
``The question is why this committee?'' Drott asked. ``For a big sophisticated company like Enron, why did they choose these people?''
Swift Descent
Enron's rapid decline -- Standard & Poor's Corp. slashed its credit rating eight levels this month to junk status -- centered on its dealings with partnerships the company used to move assets and debt off the company's books. Many investors had complained Enron's financial reports obscured the partnerships' businesses to the point they were impossible to understand. Enron's former Chief Financial Officer Andrew Fastow led some of the partnerships and earned more than $30 million through their dealings with Enron, the company disclosed.
Enron documents filed with the U.S. Securities and Exchange Commission state that the board determined that Fastow's participation in the partnerships would ``not adversely affect the interests of Enron.'' The documents also say the board approved all transactions involving partnerships that were brought to it by Lay and other Enron executives.
``What went wrong at Enron?'' said Patrick McGurn, a vice president at Institutional Investor Services, which evaluates board candidates for institutional investors. ``A lot of it goes back to the board.'' |
