It Takes a CEO by Leo Hindery Jr

Author:Leo Hindery, Jr.
Language: eng
Format: epub
Publisher: Free Press
Published: 2005-07-15T00:00:00+00:00

Enron’s board was organized into five committees. The executive committee handled urgent business matters between board meetings. The finance committee reviewed major proposed financial transactions. The audit and compliance committee —chaired by Jaedicke—reviewed the company’s financial statements (based on information supplied by the company and work performed by Andersen) and was supposed to ensure that the company complied with relevant regulations. Five of the six members of this committee had significant training and experience in managerial accounting. The compensation committee was responsible for setting and monitoring compensation policies for the company’s senior managers, and the nominating committee picked candidates for board membership.

Although the Enron board and its committees seem to have punched the clock a little more regularly than their counterparts at WorldCom, some of the same structural problems were in evidence at both companies. “Board members appeared to have routine contact with less than a dozen senior officers at Enron,” noted the Senate investigators. “The Board did not have a practice of meeting without Enron management present.” Enron board members had almost no contact with one another, or with members of the management team, between the formal board meetings.

Where the resemblances to WorldCom stop, however, the Enron directors start to look much worse—all the more so because they were skilled and experienced enough to know better. Materials obtained by the Senate investigators suggest that, unlike at WorldCom, Arthur Andersen knew full well that Enron was on shaky ground and effectively conveyed that opinion to the audit committee. In February 1999, for example, Andersen told the audit committee that Enron was using accounting practices that “push[ed] limits,” or were “at the edge” of acceptable practice. The audit committee did nothing in response. By failing to act, it gave its tacit approval to these practices.

The compensation committee looks no better. Like their counterparts at WorldCom, Enron’s directors were incredibly generous to the company’s managers—not only awarding them outlandish pay and bonuses, but using corporate assets to bail out wayward executives. For example, the compensation committee set up a $4 million personal line of credit for Ken Lay; when this proved inadequate, they raised the limit to $7.5 million. As it later turned out, Lay got in the habit of drawing down the entire amount available and then “paying it back” in shares of Enron stock. In a single year—between October 2000 and October 2001—Lay took $77 million in cash out of the company and handed over artificially pumped-up Enron shares in return. The compensation committee failed to monitor Lay’s use of this personal piggy bank.

Meanwhile, the compensation committee had no particular idea of exactly how generous it was being toward the larger management team. It approved annual and special bonus plans and then paid no attention to what those plans cost the company. In early 2001, for example, Enron paid out almost $750 million in cash bonuses—in a year when the company’s entire net income was $975 million. According to Senate investigators, no one on the compensation committee ever sat down and figured this out.

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