AFTER ENRON: THE AGE OF ENLIGHTENMENT

Simon DEAKIN (University of Cambridge, UK)
Sue KONZELMANN (University of Cambridge, UK)

The fall of Enron has again focused attention on the failure of mechanisms of corporate governance to protect investor interests. However, financial scandals of this kind are nothing new, particularly in periods of 'correction' following stock market bubbles. Moreover, there is no consensus on the wider implications of the Enron affair. Three distinct positions might be taken.

According to the first, Enron's collapse simply tells us that the existing corporate governance system is working. Once the company's plight became clear, the markets responded accordingly, marking down its stock value. The reputational damage to its senior managerial team and to its auditors, Arthur Andersen, provided appropriate sanctions for mismanagement and any breaches of fiduciary duty which may have occurred. Enron's bankruptcy will provide the opportunity for its assets to be shifted to more efficient uses and a new managerial team to take over. On this basis, there is nothing to be gained and much to be lost from regulatory reforms.

The second point of view is more skeptical. It acknowledges that some groups were harmed by Enron's fall, in particular certain outside investors (often representing the interests of present and future pensioners) and above all the company's own employees, many of whose pensions became almost valueless. The company's corporate governance exhibited serious failures of monitoring, which can be traced back to conflicts of interests on the part of board members and of its auditors Andersen. This view implies that changes to corporate governance rules are needed. These might include regular rotation of auditors, a strengthening of the role of non-executive directors, and increased rights to information on the part of shareholders. Through these relatively minor adjustments to the regulatory regime, similar collapses can be avoided in the future.

The third view offers a radically different explanation for Enron's fall. It holds that Enron's business model exemplifies the pathology of the 'shareholder value' system which became dominant in the 1990s. The company's focus on short-term stock price appreciation, in large part the result of the share options granted to senior management, was the cause of its downfall. It was this which led to the use of 'special purpose entities' to conceal debts and artificially inflate the value of the company's stock. In pursuing an 'asset light' strategy at the expense of long-term growth, the company placed itself at risk of implosion once the business cycle turned down, as happened in the course of 2001. From this perspective, the fate of Enron is less important than the future of the business model which it came to represent. Unless the regulatory framework is adjusted to make this model unattractive, it will only be a matter of time before the same approach is tried again.