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Working Paper No. 207
It’s About the Gatekeepers, Stupid
John C. Coffee, Jr.
July 30, 2002
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Understanding Enron: AIt=s About the Gatekeepers, Stupid@
by John C. Coffee, Jr..
What do we know after Enron=s implosion that we did not know before it? The conventional wisdom is that the Enron debacle reveals basic weaknesses in our contemporary system of corporate governance.1 Perhaps, this is so, but where is the weakness located? Under what circumstances will critical systems fail? Major debacles of historical dimensions (and Enron is surely that) tend to produce an excess of explanations. In Enron=s case, the firm=s strange failure is becoming a virtual Rorschach test in which each commentator can see evidence confirming what he or she already believed.2
Nonetheless, the problem with viewing Enron as an indication of any systematic
Adolf A. Berle Professor of Law, Columbia University Law School.
As a result, proposals to reform corporate governance through legislation, codes of best practice, and heightened listing standards are proliferating. See, e.g., Tom Hamburger, ACorporate-Governance Bill Weighed,@ The Wall Street Journal, May 3, 2002 at p. C-10 (discussing proposed AShareholder Bill of Rights@); Kate Kelly, AStock Exchanges Fortify Watchdog Roles,@ The Wall Street Journal, April 30, 2002 at p. C-1. The SEC has proposed changes in financial reporting, which proposals have encountered mixed reviews. See Gretchen Morgenson, AInformation Sooner, Yes, But Make It Better Too,@ New York Times, May 5, 2002, Section 3-1. Other recurring legislature proposals address auditors and the Financial Accounting Standards Board. See Michael Schroeder, ATauzin Bill Aims to Bolster FASB With Firms= Fees,@ The Wall Street Journal, April 30, 2002 at p. A-4.
This observation applies with special force to academics. Those who doubted stock market efficiency before Enron doubt it even more afterwards, pointing to the slow fall of Enron stock over the last half of 2001. Those who are skeptical of outside directors are even more convinced that their wisdom has been confirmed. For example, my Columbia colleague, Jeffrey Gordon, has proposed a new model of “trustee/directors” to populate the audit committee and perform certain other guardian roles. See Jeffrey N. Gordon, What Enron Means for the Management and Control of the Modern Business Corporation: Some Initial Reactions, 69 U. Chi. L. Rev. __ (forthcoming in 2002).
governance failure is that its core facts are maddeningly unique. Most obviously, Enron=s governance structure was sui generis. Other public corporations simply have not authorized their chief financial officer to run an independent entity that enters into billions of dollars of risky and volatile trading transactions with them; nor have they allowed their senior officers to profit from such self-dealing transactions without broad supervision or even comprehension of the profits involved.3 Nor have other corporations incorporated thousands of subsidiaries and employed them in a complex web of off-balance sheet partnerships.4
In short, Enron was organizationally unique - - a virtual hedge fund in the view of some,5 yet a firm that morphed almost overnight into its bizarre structure from origins as a stodgy gas pipeline company. The pace of this transition seemingly outdistanced the development of risk management systems and an institutional culture paralleling those of traditional financial firms. Precisely for this reason, the passive performance of Enron=s board of...