Enron's Collapse Raises Questions; Here Are Five: David Wilson
By David Wilson
Princeton, New Jersey, Dec. 10 (Bloomberg) -- Enron Corp.'s bankruptcy has become a flash point for a number of issues about how companies are run, how outside firms deal with them, and how investors determine their value.
Here are five that arose both before and after the Houston- based company's Chapter 11 filing, made eight days ago, along with some background information that may help put them in perspective.
Bonuses for Staying
1) Should a company that's filing for bankruptcy or operating under court protection pay ``retention bonuses'' to keep people on the job?
Enron paid $55 million to 500 employees as an incentive to stay for 90 days. That's equivalent to $110,000 for each employee, or 24 times the severance that the company sought bankruptcy-court permission to pay 4,000 workers fired at its Houston headquarters.
Companies tend to pay these kinds of bonuses for two reasons: to ensure that top executives stay in place after a takeover, and to give them a reason to stick around after a bankruptcy filing.
Examples of the former are plentiful. Here's one: Clear Channel Communications Inc. agreed to pay bonuses to 54 executives of Ackerley Group Inc. in connection with an $800 million takeover of the television broadcaster and billboard owner, according to a Securities and Exchange Commission.
The latter isn't uncommon, either. Polaroid Corp., which filed for Chapter 11 protection in October, is scheduled to ask a bankruptcy judge tomorrow to approve bonus payments to about 45 of its top executives.
Enron's payments were unusual because hundreds of people received them, they were provided before the bankruptcy filing, and the cash came up front. Other plans make executives wait for months, or even years, before collecting.
Employee Investments
2) Should a company encourage employees to invest in its stock through 401(k) plans, designed to provide tax-free savings for retirement, and contribute shares on their behalf that they can't sell for years?
Enron shares accounted for 62 percent of the company plan's $2.14 billion in assets at the end of 2000, according to an SEC filing. By any measure, the percentage was high.
Company stock averaged 53 percent of assets in similar plans at year-end, according to a survey by the Employee Benefit Research Institute and the Investment Company Institute. For all the plans surveyed, the average was 19 percent, or less than a third as high.
Some of the shares in Enron's plan came from the company in the form of matching contributions. Participants were restricted from selling that stock until they turned 50.
Now those employees, undoubtedly including some of the more than 4,000 people fired in the U.S. in the past week, are left to count their losses and file lawsuits. One suit contends that the workers lost at least $850 million even before the company made its Chapter 11 filing.
Financial Disclosures
3) Are accounting firms such as Arthur Andersen LLP, Enron's auditor, meeting their responsibility of ensuring that companies' financial reports are complete and accurate?
Anyone who follows Enron might quickly answer ``no.'' The company restated 4 1/2 years of results last month after failing to account properly for affiliated partnerships that bought some of its assets. The company said it overstated income during the period by $586 million.
Andersen's auditing is going through a ``peer review'' by Deloitte & Touche LLP, another of the ``Big Five'' accounting firms. The Public Oversight Board, an industry watchdog group, sent staff accountants to monitor the review -- something that hadn't happened before.
The Big Five, which also includes Ernst & Young LP, KPMG International and PricewaterhouseCoopers, also plan to submit recommendations about how to disclose partnership transactions similar to Enron's.
Robert Herdman, the SEC's chief accountant, wants quick action. ``Improvements cannot wait until a full analysis of all the facts is completed,'' he said at the American Institute of Certified Public Accountants' annual meeting last week.
Credit Judgments
4) Are credit-rating services such as Moody's Investors Service Inc. really independent arbiters of creditworthiness?
Dynegy Inc.'s proposed $23 billion purchase last month of Enron hinged on whether the target company would maintain an investment-grade rating from Moody's.
It did, thanks in part to the companies' agreement to make six concessions that the Moody's Corp. unit wanted. Phone calls from people backing the takeover, including Lehman Brothers Inc. Chief Executive Officer Richard Fuld and J.P. Morgan Chase & Co. CEO William Harrison, surely didn't hurt either.
Nevertheless, Dynegy offer's collapsed. And in the aftermath of that event, Moody's said it would look more closely at ``rating triggers'' associated with bonds or other contracts -- such as the ones that required Enron to repay $3.3 billion of debt immediately if it received a junk-bond rating.
Moody's outlined its intentions in a report published Friday. ``All parties may not behave in a rational fashion'' after these triggers go off, said Pam Stumpp, a senior credit officer, in a statement accompanying the report.
Stock Fluctuations
5) Do people actually judge the value of a security before they decide to buy?
Speaking of rationality, it's hard to explain all the twists and turns in Enron's share price last week. After closing at just 26 cents apiece the week before, the shares rebounded to 40 cents on Monday, 87 cents on Tuesday and $1.01 on Wednesday. They slid to 66 cents on Thursday, and closed at 75 cents on Friday.
The 26-cent price made sense. For one thing, bankruptcy reorganizations such as the one in Enron's future often leave common stockholders with nothing. For another, Standard & Poor's took Enron out of the S&P 500 index on Nov. 29, which meant funds tracking the benchmark had to unload shares. These funds have more than $1 trillion in assets by S&P's count.
Then again, last week's gains meant that even speculative buying of Enron's shares had its rewards. So did short covering, or the repurchase of shares that were borrowed and sold in order to profit from lower prices.
Buying and selling the stock was easy enough to do, because trading for the week averaged 178 million shares a day. So it was possible to make plenty of money without having to contemplate the company's future -- or any of the questions raised before, either. |
