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Non-Tech : The ENRON Scandal -- Ignore unavailable to you. Want to Upgrade?

To: Raymond Duray who wrote (3028)	2/25/2002 2:19:01 PM
From: Mephisto	Read Replies (1) \| Respond to of 5185

Time to curb excesses of power elite Karel Williams Monday February 25, 2002 The Guardian The business press in the United States and Britain generally takes the line that Enron represents a technical, fixable problem about the failure of governance mechanisms such as audit. While governance failure was an important part of how things went wrong, the underlying reasons why are quite different. The era of "shareholder value" created opportunities for managerial enrichment which tempted a regional power elite and Enron represents a systemic problem which raises awkward political questions about our form of capitalism. The suborning of governance was the modus operandi. And this was important because it removed any control on the various scams whereby Enron traded with itself and did so on an ever larger scale so as to avoid discovery. Every governance mechanism failed as Enron used money to influence the judgment of its auditors, audit committee, public regulators and politicians. Most notably, Andersen and other advisers, who drew millions in fees, convinced themselves that Enron's off balance sheet vehicles were no more than aggressive accounting (by a valued customer). But an analysis of the reason why needs to dig deeper and it could start by reviving the concept of a power elite which the American sociologist, C Wright Mills used to analyse Eisenhower's America in the 1950s. Enron's senior managers, its auditors and the local politicos were part of a regional power elite. Their HOUSTON round of charity dinners, trade functions, political fund raisers, sports sponsorship and expensive clubs created a group which, in Mills' terminology, exercised impersonal power on the basis of shared social intimacy. This elite created an organisation with an internal culture of recklessness. Enron recruited hundreds of young, aggressive MBAs whose bonuses and stock options incentivised them to deliver results - not to raise difficulties, like the middle aged. The resulting balance between individual incentive and corporate risk might be acceptable in a professional services firm which lived by charging out hours; in a trading house such as Enron, operating in areas where nobody understood the business model, the result was likely to be an unhealthy appetite for risk and a reluctance to accept bad news. But, equally, the temptation of Houston must be understood in the broader institutional context of US capitalism in the 1990s. This was a period of shareholder value and financialisation when the capital markets began to play an ever larger role in the calculations of corporate management who were offered unprecedented (legal) opportunities to get rich quick. Finance academics confidently recommended stock options as a way of aligning shareholder and management interests and ending the agency problems that dated back to the separation of ownership and control. In the 1990s, senior US corporate managers generally responded by writing undemanding stock option schemes which in a bull market effortlessly generated an ever larger proportion of senior management pay. Enron's senior management only went one step further: as wheeler dealers who owned large amounts of stock, they had a powerful incentive to ramp the share price by exaggerating earnings and hiding debt. Recent stock market jitters about Enronitis indicate widespread suspicion that Enron managers were not the only ones who ramped up their share price. But current paranoia contrasts quite markedly with the market's previous acceptance of whatever was reported. The stock market itself was complicit in the fraud insofar as every successful con trick needs a greedy gull who willingly suspends disbelief as much as the clever fraudster who pockets the gains. If the Enron managers manufactured earnings, they did so because that was what the stock market wanted despite, or because of, the evidence that most sectors could not reach the 12%-15% post-tax rates of return that the market required. The market recognised a chronic shortage of growth stocks but responded by willingly buying dot.com stocks where there was no credible plan for cost recovery from the product market. The question why has a simple answer: the general agenda of managerial enrichment in an era of shareholder value tempted some senior members of a regional power elite into venality which was sanctioned by their peers and developed by their juniors. The remedy is not better governance but some fundamental rethinking about management incentives and shareholder expectations. · Karel Williams is professor of accounting and political economy, University of Manchester