Enron, Board Governance and Moral Failings

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Enron, board governance and moral failings
Gerald Zandstra
Gerald Zandstra is Director of Programs at the Acton Institute for the Study of Religion and Liberty, Michigan, USA.

Keywords Directors, Ethics, Responsibility, Corporate governance Abstract The failure of the Enron Corporation has brought attention to the roles played by the chief executive officer and other executives of the modern corporation. Its failure has also produced discussion of further regulations that will, it is hoped, prevent another collapse similar to that of Enron. This article argues that the central reason for Enron’s crash was not a lack of regulations or the deceptions of executives but rather a failure of the board of directors of Enron to function in a morally and ethically responsible manner.

Introduction he stock of publicly held companies rises and falls on the leadership of its executives and its board of directors. President Bush recently developed a plan to address key issues involved in corporate responsibility. His plan, however, fails to take into account one of the most important weaknesses in the corporate governance: the board of directors. Ultimately the public and especially the shareholders have to trust that the board charged with company oversight will act in the best interest of the company. The board is the recipient of the public and shareholder trust and, in addition to portraying confidence to investors, it is responsible to see that wise decisions are made and that the law is being followed. What role did the board of directors play in the collapse of Enron and how will President Bush’s solutions address the situation?


focused on information. It insists that investors have quarterly access to information that will allow them to gain a firm sense of the corporation’s financial situation as well as immediate access to critical information. The second broad principle pertains to chief executive officers (CEOs) and other executives and their accountability to investors. The CEO must personally vouch for the truth, timeliness, and fairness of information sent to investors and cannot benefit from financial statements which provide false or misleading information. Instead of the lag time currently in the system, the President proposes that executives who buy or sell stock be required to more quickly inform the public. Those who are found to be in violation would lose their right to serve in a position of corporate leadership. The third principle addresses audits. In the President’s plan, it would be expected that investors would be able to have complete confidence in financial audits and that those doing the audits be held to the highest ethical and professional standards. Unfortunately, none of these principles addresses the role of the board of directors. While executive behavior and information and auditing are certainly important matters that must be considered, it is important to look carefully at the makeup, expertise, and responsibility of the board to determine if part of the blame for Enron’s collapse belongs to the board.

Presidential solutions On March 7, 2002, President George Bush outlined his plan to improve corporate responsibility and protect America’s shareholders. The plan has three core principles. The first is

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The Enron board of directors One look around the Enron board room in 2000 would instill confidence in any investor who could be assured that the company was in the hands of legal, ethical, political, and economic leaders. Surely they would be sufficient gatekeepers. In addition to Kenneth Lay and Jeffrey Skilling, there were 15 external directors whose resumes were impeccable. These were...
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