Fifteen years ago this month, the once high-flying energy company Enron completed its massive collapse when it filed a petition for bankruptcy protection. In his interesting December 2, 2016 post on the Harvard Law School Forum on Corporate Governance and Financial Regulation (here), Michael Peregrine of the McDermott, Will & Emery law firm takes a retrospective look at Enron’s downfall and suggests a number of different ways that those events have continuing relevance. As I discuss further below, there are, in addition to the considerations Peregrine notes, a number of other continuing legacies of Enron.
Enron’s slide toward eventual bankruptcy began earlier in 2001, when the company’s rapid growth began to attract scrutiny and its once-stratospheric share price began to decline. The company’s decline accelerated after CEO Jeffrey Skilling resigned in August. Sharon Watkins sent her whistleblower letter to Enron Board Chair Kenneth Lay in early October. Later in October, the SEC announced it was investigating related party transactions at the company. On October 25, Enron CFO Andrew Fastow was fired because of his involvement in related party transactions. On December 2, 2001, after efforts to sell the company failed, the company filed for bankruptcy.
The Enron bankruptcy was at the time the largest bankruptcy in U.S. history, and, as Peregrine notes, it also “served as a leading prompt for the enactment of the Sarbanes-Oxley Act, and the corporate responsibility movement that followed.” There is no question that the events surrounding Enron’s collapse were significant; in his article, Peregrine contends that the lessons of Enron’s collapse remain relevant, as well.
First, Peregrine suggests, Enron’s demise “provides jaw-dropping examples of problematic governance conduct from which no board, at any time, is safely immune.” It is important to remember that the Enron board members were not a bunch of lightweights; the Enron board included a former federal regulator; a member of the British House of Lords and former British cabinet member; current and former board chairmen and several senior executives of large corporations. Yet Enron collapsed despite its Board’s impressive roster.
The Enron’s boards oversight failures were chronicled by the board’s special investigative committee led by William C. Power, Jr., then the dean of the University of Texas law school. The failures, Peregrine notes in a companion piece to his blog post that appeared in the New York Times (here), included
inadequate and poorly applied internal controls, insufficient vigilance of corporate affairs, the suspension of the code of ethics to allow certain transactions to proceed, not responding properly to warning signs, cursory attention by the audit and compliance committees to critical matters placed on their agendas, the lack of abundant flow of information and, perhaps most important, not recognizing the significance of some of the information about problematic transactions.
Second, the events surrounding Enron’s collapse provide “clear explanation” for the current “corporate accountability environment,” and also help explain the Sarbanes-Oxley Act. In essence, Peregrine suggests, Enron is the “root” of the modern corporate governance “tree.” The Enron saga provides a “clear rationale” for the now-standards governance policies and procedures, many of which may otherwise seem to represent more of an emphasis on process rather than substance. Peregrine suggests that Enron’s lessons underscore the need for boards to remain vigilant, highlighting Enron’s continuing relevance for corporate boards today.
I concur in Peregrine’s views about Enron. I particularly concur in his views about the impact of Enron on corporate governance. Enron’s most important legacy is its impact on corporate governance. As a result of the heightened scrutiny and regulatory reforms that followed in the wake of the Enron scandal, boards generally have become and remain more active, independent and involved.
I also think there are several additional ways in which Enron’s legacies have continuing relevance.
First and foremost, the company’s name – Enron – has passed beyond a mere reference to a high-flying company that failed a decade and a half ago. “Enron” is now a byword for corporate misconduct, providing a convenient shorthand way to refer to corporate misbehavior. To choose but one example, when the Satyam scandal first came to light in 2009 (eight years after Enron’s collapse), the company quickly became known as “India’s Enron.” Indeed, while Enron’s name continues to be used to refer to the specific events that happened at the company and the criminal prosecutions that followed, these days it is largely used in this more general sense, as a shorthand expression for corporate scandal. As a Houston Chronicle article put it years after Enron’s collapse, the company’s name is now a “synonym for corporate fraud, individual greed and executive hubris run amok.”
Second, one of Enron’s most important continuing legacies is the whistleblower culture that is now an important component both of internal compliance and of regulatory oversight. In a tribute to Enron whistleblower Sharon Watkins, Congress included a number of whistleblower protections in the Sarbanes-Oxley Act, which was in turn the antecedent to the Dodd-Frank Act’s creation of the SEC whistleblower program. As the SEC’s recent report of its whistleblower program underscored, the encouragement and protection of whistleblower is now an important component of the agency’s regulatory and enforcement program.
Third, another of Enron’s enduring legacies is a heightened public expectation that corporate executives who engage in misconduct must be held accountable. Indeed, I would argue that part of the reason there was so much anger around regulators’ more recent failure to prosecute responsible individuals following the credit crisis was a sense that regulators were still not doing enough to prevent corporate misconduct. Behind this popular expectation of individual prosecution is a generalized perception that too many corporate executives are crooked; this perception has its roots in the revelations and scandals that followed Enron’s collapse. As a result of the Enron scandal, not only is the general population readier to believe that corporate executives are crooked, the general population pretty much just assumes that is the case. The U.S. Department of Justice’s “Yates Memo” is many ways a product of continuing perceptions about corporate misconduct.
Fourth, in addition to the corporate governance impacts noted above, Enron continues to have another, more subtle impact in the board room. Many corporate board members remember that the individuals who served on Enron’s board were forced to contribute out of their own assets to settle the securities class action litigation that followed the company’s collapse. Even though over time it has proven to be the exceedingly rare occasion when corporate executives are called upon to contribute out of their own assets to resolved civil litigation against the board, the well-publicized outcome of the Enron litigation continues to haunt many corporate officials. The continuing discussion of issues surrounding the question of how corporate directors and officers can best be protected from their liability exposures has at its root a continued concern based upon the Enron settlement.
Fifth, Enron continues to have an impact on the securities class action litigation environment. To be sure, the impact has changed over time. After the Enron civil litigation settled, the enormous amounts paid in settlement of the cases created an upward pressure on all securities class action settlements. For a while it seemed as if Enron had permanently revised the notion of “what these cases settle for.” In part that was because there were a number of huge corporate scandals at about the same time that Enron blew up, and those other scandals also resulted in massive settlements. As time has gone by, and the massive settlements from the era of corporate scandals have receded further into the past, the idea that the Enron settlement had permanently ratcheted up the range of settlements for securities class action lawsuits has eased. Average and median settlements are no longer stuck in an irreversible upward march; more recently, the averages and medians have fluctuated from year to year. But Enron continues to have an impact, like the gravitational pull from a large celestial body nearby. It is the extreme example that creates an atmosphere in which lesser but nonetheless large settlements can occur. Enron continues to provide a kind of measuring stick against which other cases are compared.