Enron board members get off easy

Don't expect any members of Enron's Board of Directors to do the perp walk with Kenny Boy and his cohorts.

Enron's 14-member board could escape the collapsed company with little more than bruised reputations and perhaps a few million dollars in civil settlement payments.

"The defense that boards typically rely on is that they were not told by management what was really going on, that they were lied to," said Paul MacAvoy, a professor of corporate governance at Yale University in New Haven, Conn.

Board members traditionally get their information from management and the gatekeepers -- the law firms and external auditors -- and that distance from key information makes it difficult for prosecutors to prove criminal intent.

"Unless you have something like a document where a board member says, `This is illegal but we're doing it anyway,' criminal intent for a board member is hard to prove," said Franklin Edwards, a professor of finance and corporate governance at Columbia University's Graduate School of Business in New York.

Charles "Hank" Still, a partner with Fulbright & Jaworski, notes that prosecutors would have to prove that criminal state of mind to a jury beyond a reasonable doubt.

"It's a standard that's much tougher than in civil court," Still said.

Before the bankruptcy, Enron's board was seen as a model of good corporate governance. The board had all the recommended committees and procedures in place and was deep with experience. Wendy Gramm, the wife of former Republican Sen. Phil Gramm, came to the board after a stint as chairwoman of the Commodities Futures Trading Commission, a position that made her very familiar with Enron's business. Another board member, Robert Jaedicke, was qualified for his role on the audit committee as former dean of Stanford University's Graduate School of Business in California.

Despite that knowledge, the board has been criticized for failing to react to what some have called clear signs of trouble. A July 2002 report by the Senate Governmental Affairs Committee's Permanent Subcommittee on Investigations claims the board " ... knowingly went along with Enron's high-risk accounting and off-the-books deceptions."

A report by bankruptcy examiner Neil Batson also said the board failed to serve as an effective check against bad decisions at the company but was more moderate in its criticisms of the board members themselves. It concluded that the board had many of the right tools and mechanisms in place to do its job but did not understand the complexity of company transactions, was inattentive to its oversight function and may have been lied to by management.

W. Neil Eggleston, an attorney representing the directors, said the board couldn't have done more.

"All of the reports say the board was widely misled by management, and none of them concluded that they were participants in the fraud," Eggleston said.

I read all this, and I have to wonder, what's the point of having a board of directors? These folks had procedures, experience, and plenty of business knowledge, and in the end all they can say is it wasn't their fault that they knew nothing about what was really going on. I can buy that they were misled, but that brings me back to my question. What was the point of their existence? What value did they add for Enron's employees and shareholders? If management deception can obviate their role as overseers, why pay someone for that kind of oversight?

I'm sure the answer is that these smart, experienced, savvy people should have at least asked a few questions and done a little checking up on their own, and I hope that as a result of their abject failure they get some punishment in the civil courts. Because if they are let off the hook, if the courts do decide that there was nothing anyone could have done, well, you know what I think.

Posted by Charles Kuffner on July 09, 2004 to Enronarama | TrackBack