Nearly everything Enron did was “aided and abetted” by its friends in government. From tax breaks to board members in powerful positions to consulting-auditing loopholes, it was all about who you knew. Of course, Enron is no more, and Kenny Boy—who cost investors $60 billion—was just indicted. But there's still no corporate-political firewall, says policy expert Charlie Cray, and that should be making us all nervous.
Charlie Cray is the director of the Center for Corporate Policy and a collaborator on Halliburton Watch. His book, The People’s Business: Controlling Corporations and Restoring Democracy, (co-authored with Lee Drutman) will be published by Berrett-Koehler in November.
After seeing Ken Lay and 30 other top Enron executives do the “perp walk” (10 have pled guilty so far), it’s tempting to believe that the culprits responsible for the epidemic of corporate crime of recent years may soon have to turn in their pinstripes for wide stripes. Yet while federal prosecutors continue to diligently pluck the rotten apples off the higher branches of the corporate hierarchy, unless and until someone gets serious about addressing the structural roots of that fiasco, we are certain to reap many more bitter harvests in the future.
The Enron Fraud Task Force should be commended for unraveling the complicated details of Enron’s collapse, rejecting any political pressure to quickly file charges against the top brass while painstakingly working their way up the chain of command. Ken Lay’s arrest brings small satisfaction to the tens of thousands of workers, pensioners and small investors who will never recover the $60 billion they lost—an amount the FBI estimates is three times the annual cost of street crime in the entire country.
That the Enron investigation remains open is a good thing, given that many fingerprints were found all over that fraud.
Take Enron’s board. Although the company’s directors have paid a modest sum to settle certain civil suits, it’s unlikely any of them (apart from Lay) will ever do any time. So much for President Bush’s assertion to a roomful of top cops on September 2002 that “ no boardroom in America is above or beyond the law.”
In truth, state “exculpation statutes,” court doctrines (e.g. the “business judgment rule”) and the indemnification clauses that come with most board members’ contracts have made it nearly impossible to hold the directors of these “doom machines” (as corporate governance expert Robert Monks once described the corporate form) to account. Instead, we’re hearing how corporate America is cleaning up its own act. The Business Roundtable claims that “substantial progress” has been made in corporate governance since Enron, because the percentage of independent directors has increased substantially.
Yet directors are hardly “independent” if they are handpicked by the CEO or other board members, and little has changed in that regard. After all, Enron had a majority of outside board members, including a senator’s wife (Wendy Gramm, the former head of the Commodities Futures Trading Commission, who joined Enron’s board just weeks after pushing through a measure that exempted the company’s energy derivatives contracts from federal oversight) and the dean of the Stanford Business School, who as the chair of the company’s audit committee didn’t notice CFO Andy Fastow’s book-cooking or stop Ken Lay from cashing out while telling employees the stock was still a good buy.
The SEC’s William Donaldson was expected to be a marked improvement over the hapless Harvey Pitt. Under Donaldson’s leadership, the SEC’s budget is nearly double what it was before Enron, when the anemic and overworked enforcement division managed to review just 16 percent of the annual financial reports filed each year. Yet Donaldson, too, has buckled under pressure from the Chamber of Commerce and the Business Roundtable, reversing his support for a modest reform that would permit shareholders to themselves nominate independent directors. So much for all that corporate blather about “shareholder democracy.”
“The Last Thing We Do…”
Since the lawyers have eluded any significant blame, the Enron prosecution drama could also hardly be described as Shakespearean. In his report, the company’s bankruptcy examiner (who himself was paid an eye-popping $100 million to explain what happened) lays out in detail the circumstantial evidence that attorneys at Vinson & Elkins violated their duty by signing off on those infamous “special purpose entities” used to hide the company’s debt off the books.
Experts in securities law correctly view the failure of Enron’s lawyers as just part of a larger systemic pattern. Columbia University Law School’s John Coffee was one of the first to note that key to the entire epidemic of corporate fraud and abuse was a series of court decisions and tort “reform” laws such as the Private Securities Litigation Reform Act (PSLRA) of 1995. The PSLRA imposed steep barriers against investors who might want to take the accountants, lawyers and bankers—the market system’s “gatekeepers”—to court for failure to perform their duty and even (in some cases) “aiding and abetting” the fraud itself.
Yet instead of repealing the PSLRA, Congress has taken up the so-called “Class Action Fairness Act,” and other assaults against the rights of aggrieved victims (this time consumers and victims of medical malpractice) who might seek justice through the civil justice system.
Two years after the Sarbanes-Oxley Act of 2002, the evidence is also clear that the accounting reform law didn’t go far enough. A preliminary report released at the end of June by the Public Company Accounting Oversight Board (PCAOB, created by Sarbanes-Oxley to police the accounting industry) found that accounting firms are still providing both auditing and consulting services to the same clients—a circumstance identified as a significant factor in the accounting scandals. Tax consulting fees, for example, only declined from 57 to 43 percent of the amount paid for audit work conducted by the Big Four between 2002 and 2003.
Even business leaders such as the Conference Board’s blue-ribbon Commission on Public Trust and Private Enterprise, co-chaired by John Snow before he became secretary of the Treasury, conclude that audit firms should ultimately be barred from providing other services to the same clients: “[P]public accounting firms should limit their services to their clients to performing audits and to providing closely related services that do not put the auditor in an advocacy position, such as novel and debatable tax strategies and products that involve income tax shelters and extensive offshore partnerships.”
The obvious has become inevitable. Within a year after Sarbanes-Oxley, Sen. Carl Levin revealed that accounting firms continue to aggressively sell tax shelters that cost the U.S. Treasury as much as $18 billion a year.
Recall that Enron paid no taxes in four of the five years before filing for bankruptcy. That seemed astonishing until it was revealed that, as in so many other things, Enron was just the extreme example of a broader trend.
Most big U.S. multinationals have converted their tax and accounting departments into high-pressure profit centers working to develop intricate strategies to game the tax code. According to a GAO report released in June, over half of U.S.-based corporations and more than 71 percent of foreign-based firms operating in the United States paid no income tax between 1996 and 2000. And that was before Bush’s rolling series of major corporate tax cuts (there’s “Enronomics” for you—trickle-up fiscal policies designed to let the wealthy cash in before the system collapses).
A proposal by Sen. Levin to close the Sarbanes-Oxley tax-consulting loophole (supported by the SEC) was, of course, quietly shot down.
Other, less-ambitious reforms that have also been tossed out include a proposal by Sens. Grassley, R-Iowa, and Baucus, D-Mont., to eliminate the ability of corporations to deduct any penalty payments from their taxes (a good portion of the Wall Street banks’ settlement with New York Attorney General Eliot Spitzer and the SEC will thus be paid by you and me as U.S. taxpayers), as well as a bill that would empower defrauded investors to seek restitution from corporate criminals (by, for instance, eliminating state homestead laws that allow corporate criminals to keep their mansions).
Failing the “Acid Test”
The most obvious evidence of a corporate backlash is the lack of any significant attempt to rein in skyrocketing CEO pay—what Warren Buffet has called the “acid test” of corporate reform. Despite a dip after Enron, U.S. CEOs are still paid well over 300 times the average workers at their companies. The ratio was just 35 to 1 in 1970.
A proposal to force corporations to report stock options on their books—the “steroids of corporate greed” that created a strong incentive for executives to cook the books in order to meet projected earnings so they could buoy the stock price and cash out before the stock price it crashed—has had strong support from hundreds of major Fortune 500 companies, Alan Greenspan, the SEC and Treasury Secretary Snow, Arthur Levitt and many other leading luminaries of economic policy. Yet the proposal has been stalled by stiff resistance from the high-tech industry and diversionary proposals from its allies in Congress.
The dickering and deflection of these modest reforms has had a second benefit for corporate America. It has constricted the debate by consigning any discussion of the broader lessons to the national archives, including the obvious failures of the ideological drive toward deregulation and the self-governance model of corporate capitalism. As James Brock suggests in his new book The Bigness Complex (Stanford), the utter lack of interest in antitrust enforcement combined with the gutting of New Deal-era laws that placed structural restraints on the corporations’ ability to form conglomerates (e.g. Glass-Stegall and the Public Utility Holding Company Act, whose full repeal was supported by both parties in a recent energy bill that failed to pass) has created a corporate economic system whose inherent conflicts of interest are hardly remedied by a patchwork system of regulations laws like Sarbanes-Oxley that attempt to regulate around the edges rather than cut to the core. Thus, instead of an industrial policy debate that even considers anything related to fundamental democratic controls over corporations, we are left with an attenuated discussion over questions of corporate “reform,” including weak suggestions concerning corporate governance, and a blizzard of complicated regulations that only the corporations and their lawyers and lobbyists have the ability to give their sustain attention.
“The Crooked E” and the GOP
Recall that shortly after Enron collapsed, President Bush immediately tried to distance himself from his biggest career patron—all of a sudden “Kenny Boy” had become “Mr. Lay” and “a supporter of Ann Richards in my run (for governor) in 1994.” The Bush spin was also that Enron was a business scandal that had nothing to do with politics—an astonishing assertion from a president whose administration included more than 40 ex-Enron lobbyists and employees.
Everything Enron did was virtually “aided and abetted” by its friends in government. That’s the nature of crony capitalism. The recent transcripts that surfaced of Enron traders who bragged about sticking it to “grandma Millie” in California, for example, should should remind us that remembering that Ken Lay himself handpicked Bush’s FERC chair (who refused to act during the California crisis until it was obvious that companies like Enron were manipulating the system) and personally lobbied Vice President Cheney to oppose any pressure on the FERC to lower the state electricity price caps.
We were once again reminded of how incestuous Enron and the Republicans were by a July 12 report on the front page of The Washington Post about an ongoing investigation into Texas GOP leader Tom DeLay's use of Enron money for his Texas redistricting project (it’s illegal in Texas for corporations to contribute to state political campaigns).
Obviously there is no business-political firewall. It should terrify us all that in just a short time, “Kenny Boy’s” favorite regime has continues to used “Enronomics” to cook the federal books (remember the story about that projected $44 trillion deficit that was quickly buried?), passing a series of tax cuts so obviously designed to help their rich friends cash out before the entire façade comes crashing down. Yet if history has a way of repeating itself, maybe now that Ken Lay has been dragged off, we’ll start to see some of Enron’s political partners doing the “perp walk” too.
