Enron Board Comes Under a Storm of Criticism
The New York Times
December 16, 2001
By REED ABELSON
A ll may not be forgiven. In the clubby world of
corporate boardrooms, outside directors are
rarely held responsible for what befalls their
companies. But as more questions emerge over the
board's independence and role in the collapse of
Enron , the outsiders who were Enron
directors are coming under sharp criticism. And
doubts are increasing over whether they will ever
be named to other boards.
"The directors of Enron are going to carry this
stigma with them," said Patrick McGurn, a vice
president at Institutional Shareholder Services,
which advises large investors about proxy issues.
"Usually the directors get a free ride when things melt down."
What makes the Enron case different, Mr. McGurn said, is how "sudden and final" the company's fall was for its
shareholders. "Anger is going to linger from this situation for quite some time," he added.
The board's judgment in allowing partnerships and other entities that helped keep so much debt off Enron's
books and off the minds of shareholders has also been questioned. "This board, on the surface of it, is in deep
trouble," said Robert E. Mittelstaedt Jr., a business professor at the Wharton School at the University of
Pennsylvania.
The variety of potential conflicts, some of which are not disclosed and others merely hinted at in Enron's
financial filings, also cast a shadow over the board and its actions in recent months.
Last week, the chief executive of Arthur Andersen, Enron's auditor, testified in Congress that Arthur Andersen
had informed the board's audit committee of "possible illegal acts within the company" regarding the accounting
over one of the entities in early November. Enron says that it was management that first alerted the auditor to
potential problems.
Lawsuits also abound, many aimed at the board, including one that claims some
directors engaged in "massive insider trading."
The Amalgamated Bank, a union-owned bank that has become known as a
shareholder activist, brought the lawsuit in federal court in Houston this month
against some Enron officers and directors. The suit contended that these
people made misleading statements about the company and sold about $1 billion
worth of stock in the last three years.
Though the suit does not say how much the officers and directors profited from
those sales, much of the proceeds represented the sale of stock from options
given at low prices, said William S. Lerach, one of the lawyers representing the
bank.
Even if the suit fails, it has added to the doubts about the credibility of the
Enron board, which was one of the highest paid in the country last year.
"There will always be a question of what this board was doing and thinking," said Thomas L. McLane, vice
chairman of the Directorship Search Group, an executive recruiting firm based in Greenwich, Conn. "Their
marketability is not very good."
What is already clear is that myriad relationships between directors and the company cast doubt on directors'
independence. Consulting agreements are disclosed in the proxy statement. But subtler ties have also drawn
attention, like the donations by the company to some of the institutions employing the directors.
Much of the focus will be on the board's audit committee because of its responsibility for Enron's accounting and
financial reporting. The chairman of that committee, Robert K. Jaedicke, a former accounting professor at
Stanford, is one of a handful of directors who go back to Enron's beginning with the 1985 merger of two energy
companies, InterNorth and Houston Natural Gas.
Another member of the audit committee, Wendy L. Gramm, a former chairwoman of the Commodity Futures
Trading Commission and the wife of Senator Phil Gramm of Texas, says it is a conflict to own stock in Enron.
Dr. Gramm has requested that the equity she would receive as pay for serving as a director under the
company's 1991 stock plan be put into an account where payment is deferred for some time.
This conflict did not prevent Dr. Gramm from selling nearly $300,000 in stock at the end of November 1998,
according the lawsuit claiming insider selling. And Dr. Gramm owned stock options in another public company,
IBP, in which she served as a director this year, according to IBP's proxy statement.
Dr. Gramm and her husband decided in late 1998 that they would not own any common stock, as a way to avoid
any appearance of conflict because her husband is a senator, Mark Palmer, an Enron spokesman, said. Dr.
Gramm never owned IBP stock but simply cashed out the value of the options, Mr. Palmer said. When she told
Enron that she could not own Enron stock, he said, the company decided not to pay her in any equity except in
the deferred account.
Some corporate governance experts wonder how someone who cannot own stock in a company can serve on its
board.
Other members of Enron's audit committee sold stock in recent years, the lawsuit contending insider trading
says. The suit says Mr. Jaedicke, for example, disposed of about $841,000 in stock, about $500,000 this year.
Among the other outside directors who sold stock, the lawsuit said, were Norman P. Blake Jr., the chairman and
chief executive of Comdisco (news/quote), who sold $1.7 million in stock about a year ago. Charles A.
LeMaistre, one of the original Enron directors and a former president of the University of Texas M.D. Anderson
Cancer Center, sold about $842,000 worth of stock in 1999 and earlier this year, according to the lawsuit.
Enron directors certainly were well compensated. They are ranked seventh in total remuneration in 2001 with
$380,619 worth of cash and stock, according to a director compensation study by Pearl Meyer & Partners, a
New York based compensation consulting firm, which based the rankings on the value of a company's stock on
the date of its annual meeting.
Whether the directors engaged in insider trading remains to be proved, of course, but the sales by members of
the board raise questions. "As a director, you should never sell stock until you leave a company's board," said
Charles M. Elson, the director of the Center for Corporate Governance at the University of Delaware. While
selling stock is a director's legal right, the sale sends a bad signal to shareholders, he said.
"There really is no good reason to do it," Mr. Elson added.
Aside from the various consulting contracts and other business relationships disclosed in the proxy statements,
there are ties that are not made clear.
Dr. LeMaistre, for example, does not list other directorships. But he became a director of a now-struggling
public biotechnology company, International Isotopes, in 1998.
Dr. LeMaistre described the company as "insignificant," according to Mr. Palmer, the Enron spokesman. The
company's most recent public filing, dated in early November, lists Dr. LeMaistre as one of the directors, but Dr.
LeMaistre says he has resigned from that board.
The proxy does not disclose that Herbert S. Winokur Jr., another of the directors from 1985, serves on the board
of the Natco Group (news/quote), a company that has been public since early 2000. The proxy does disclose
some ties to the company, including sales by Natco to Enron subsidiaries. Over the last three years, those sales
totaled $1.5 million. The description of Natco as privately held was a mistake, according to Mr. Palmer of
Enron.
While directors are not obligated to disclose their board seats in privately held companies, there is no ambiguity
over whether to list directorships in companies whose shares are publicly traded in the United States, said
George Wilson, vice president of the SEC Institute, which provides training to companies on how to comply with
securities laws.
Already facing litigation, the outside directors have hired their own lawyers. Gibbs & Bruns, a Houston firm, is
representing them as well as two former outside directors.
While the directors are covered under the company's insurance for directors and executives, the language of the
policy may determine whether they continue to be covered under all events. Many insurers, for example, might
refuse to pay if there has been fraud or when there have been significant changes in the company's financial
condition, such as restatements, suggesting that the initial application was flawed.
Some shareholders have argued that Enron's outside directors have not come forward to communicate with
investors and demonstrate their independence. The A.F.L.-C.I.O. and the Amalgamated Bank wrote to Enron's
board in early November, raising questions about the independence of some board members.
"What Enron shows us is that shareholders need individual relationships with outside directors," said William
Patterson, the director of the office of investment for the A.F.L.-C.I.O., some of whose affiliated unions owned
shares in Enron.
So far, the directors are remaining silent. Mr. Jaedicke referred questions to Enron, and Mr. Blake, Dr. Gramm,
Dr. LeMaistre and Mr. Winokaur did not return phone calls last week. They did not comment on the lawsuit
accusing them of insider trading and would comment on some of the other issues only through Mr. Palmer, the
Enron spokesman.
While some of the omissions in the proxy statement and other relationships may not be significant, they may
provide a fuller and not particularly flattering portrait of the board.
"All of this demonstrates a laxity in the corporate culture," Mr. Elson said.
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