Posted on 02/17/2002 10:43:16 AM PST by Tumbleweed_Connection
HOUSTON (AP) - At best, they were bamboozled by executives who offered empty assurances and fuzzy math in place of lucid balance sheets. At worst, they rubber-stamped shady deals and then stood by idly as secretive partnerships helped bleed Enron Corp. to death.
Neither scenario can be particularly comforting for the 15 current and former independent directors of Enron who have served since the board waived the company's ethics code to let a top executive work both sides of business deals with the company.
"When you're on the board and someone comes to you and says he wants to waive a conflict-of-interest rule, here is why they pay you all that money," said Nell Minow of The Corporate Library, which monitors governance issues.
"They don't pay you to smile and have your picture in the annual report."
Now the board members, who hail from four continents and represent nearly every region of the United States, face lawsuits and inquiries as others debate their culpability.
Washington attorney Neil Eggleston, who represents the entire current board and has advised them not to speak publicly as individuals, said the group is better portrayed as victims than perpetrators.
"Most of the outside directors have full-time jobs and they're expected to be outside directors, not managers of the company," Eggleston said. "They have to - and the law permits them to - make judgments based on advice from management, inside legal advisers, outside legal advisers and the outside accounting firm."
A voluminous internal report, headed by new director William Powers and released earlier this month, criticized the board for not thoroughly questioning problematic deals and not monitoring them after approval.
"The board of directors was denied important information that might have led it to take action (sooner), but the board also did not fully appreciate the significance of some of the specific information that came before it," read a section of the report written by Powers and professional corporate director Raymond Troubh, another board latecomer.
Herbert Winokur Jr., a longtime director and third member of the investigative committee, abstained from portions of the report addressing board conduct and testified before Congress earlier this month that he disagreed with some conclusions.
"With the benefit of hindsight, the report criticizes our decision (to form a partnership with a group headed by Enron chief financial officer Andrew Fastow), but our business decisions can only be evaluated based on the facts known to us at the time when we made it," Winokur told an investigative panel of the U.S. House Energy and Commerce Committee.
The Powers report concurs that the board was not given crucial information that almost certainly would have led to sorely needed scrutiny of various partnerships engineered by Fastow. The report also agreed that auditing firm Arthur Andersen LLP and law firm Vinson & Elkins failed to warn the board of impending bookkeeping hazards.
Andersen has criticized the board's report as self-serving. A Vinson & Elkins partner echoed the board in saying Enron management did not disclose details of partnerships.
But the report didn't spare the board, either. Some examples:
- The board should have demanded more detail about Fastow's compensation before agreeing to waive the code of ethics in June of 1999, which allowed him to create the first LJM partnership and go on to make millions dealing with Enron.
Also, Powers determined the board "did not consider the need for safeguards that would protect Enron in transactions between Enron and LJM1," another partnership.
- While the report said Fastow's proposal for yet another partnership, LJM2, was worth considering on its face, the host of accounting controls enacted to protect Enron's interests should have been a warning sign.
"A conflict of this significance ... should not have been approved in the first place," Powers said.
Audit committee members spent 10 to 15 minutes a meeting discussing the complex LJM transactions, the report discovered, and there is no evidence directors probed the millions Fastow apparently was making from the deals until last October, when the company was already dying.
During congressional testimony Feb. 7, former chief executive officer Jeffrey Skilling said he couldn't remember much from one Florida board meeting where the partnerships were discussed because of confusion caused when the lights in their meeting went out.
In other words, Skilling said board members literally were in the dark.
- Another "red flag" should have been seen in a a set of transactions called the Raptors, initiated May 1, 2000.
Board discussion of them "suggested an absence of economic substance," the report said. It said the board should have ordered a special review by the audit committee, which in turn should have had tough questions for Arthur Andersen.
The report noted that Andersen, along with internal auditors, signed off on the Raptors and participated in other financing arrangements. The exposure and settling of the various transactions in late 2001 shaved Enron's previously reported profits by $586 million and sped its descent into bankruptcy Dec. 2.
Unknown to most insiders and virtually all outsiders, Enron actually began to crumble last spring when the accounting schemes that set up the Raptors began unraveling.
"The Raptor problem was huge for the company in terms of its creditors," said Eggleston, the board's attorney, who said that neither the partnerships' lack of creditworthiness nor the $800 million worth of Enron stock used to prop up the Raptors last March was disclosed to the board.
Many directors suffered sizable losses when Enron's stock crashed last year - New York oilman Robert A. Belfer, who with his brother-in-law were Enron's largest stakeholders, reportedly lost around $1 billion in value alone. Corporate governance expert Charles Elson contends their own holdings should have made them that much more inquisitive.
"The question would be, once (insider partnerships) are established, 'Are we doing this anywhere else in the company?' " Elson said. Powers estimates there were about 3,000 other partnerships that have not been investigated yet.
"If they're going to hide something from you it's almost impossible to detect it. You're relying on the good intentions of management. On the other hand, in this case there were very strong clues."
Troubh, who helped Powers prepared the report, is a corporate governance maven who sits on numerous boards. He said directors shouldn't be expected to pick apart minutiae, but that doesn't absolve them of responsibilities.
"Committees should monitor the information that comes in and press hard with the professionals they hire to overview this stuff," Troubh said.
While corporate boards often include one or more management figures, their roles are to make sure those running companies are doing so properly.
Their meetings are always closed-door and their outside members typically aren't public faces of the company, making their dealings obscure even to people affected by them most.
The more independent corporate boards are, the better they are at scrutinizing the companies they oversee. The kinds of things that compromise that independence are consulting contracts with the company, common bonds to charities and memberships on other boards doing big business with the company. Ten of Enron's 15 most recent independent directors, excluding Powers and Troubh, had such conflicts.
Enron and its officers have given heavily to or promoted charities close to directors John Mendelsohn, Charles A. Lemaistre, Wendy Gramm and John H. Duncan. Enron-related political money also has flowed to Gramm's husband, U.S. Sen. Phil Gramm, R-Texas.
The company has had long-standing consulting relationships with director John Wakeham and former board member John A. Urquhart, who disclosure forms indicate has earned in more than $6.5 million worth of fees and expense reimbursements since 1991. Non-employee directors averaged $79,107 in regular compensation in 2000.
Winokur and Belfer have had outside business ties to Enron, while Blake also serves on the board of Owens Corning Corp., which signed a $1 billion energy management deal with an Enron affiliate in 1999.
Former director Joe H. Foy is a retired partner of major Houston law firm Bracewell & Patterson LLP, which last month severed ties with Enron.
In a board shakeup, the three overseas directors - Wakeham, Ronnie C. Chan and Paulo V. Ferraz Pereira - will leave next month along with audit Duncan, LeMaistre and audit committee chairman Robert Jaedicke. Only Gramm and Mendelsohn will remain from the audit committee.
Attorneys representing shareholders, destitute retirees and laid-off workers contend directors were the ultimate authority and should be held responsible.
But neither Minow nor Elson, despite their criticisms of the board, believes Enron's outside directors ultimately be held liable.
"The odds of any director liability is about zero," Minow said, noting a 1980s case where directors were forced to pay damages for negligence caused states to tighten director-liability laws.
The Enron debacle may spur politicians and regulators to toughen laws and rules to prevent a similar mess, Minow said. She foresees diversification requirements for retirement accounts, more oversight of accountants and the regular rotation of auditors.
Minow lamented that laws governing boards, which come at the state level and generally follow Delaware's standard, are unlikely to change anytime soon. She hopes companies will take the initiative themselves.
"I guarantee you that every (corporate) lawyer in America is calling every client saying, 'We need to talk about what your board is doing,' " Minow said.
However, another and in my opinion more important check and balance in protecting stockholders is suppose to be that of the independent auditor, in the case of Enron, Aurthor Anderson. Well AA blew it. But what is worse, Aurthor Anderson continues after Enron to continue to front sleezy accounting deals. Some government agency, whether it is the SEC, Justice Dept or what needs to make an object lesson out of A. Anderson so that people can trust the financial results of publicly traded companies.
In case you think I am a little harsh on the firm of AA, please check out the following link, which proves that AA is still up to its sleazy cheating ways.
Article on post Enron A Anderson shaddy deal
"Pacific Aerospace and Electronics Inc., the Wenatchee-based manufacturer, discharged KPMG as its auditor on Jan. 29 (2002)and signed up Andersen the next day." To find out why click on the above link!
You are right that many view their appointment as a networking perk, where they have coffe and donuts once a month or quarter and are paid big bucks for nothing. Unfortunately, the courts view the role a bit more seriously. Outside directors can play an important check and balance role for a company.
Andersen is already losing clients. They are already being held accountable.
Of course if criminal conduct occurred it should be punished. But the market will probably do far worse to them.
What this article doesn't say, is that Andersen performed both internal and external audit functions, in addition to their consulting business.
Most outside board appointments are (1) window dressing, (2) influencial people who may be able to help gain influence if something really bad comes up. I admit that facetime with rubber stamps are what most outside board members have become.
It is not what they are suppose to be or do. I know that my wife and I when asked to serve on boards take active roles. Outside board members are to serve as a check and balance against internal company leadership going off the deep end to the detrement of the stockholder. I hope that the courts remind the world of those facts and that outside directors start to perform their function.
I hope you are right. Part of my concern is that I see things like I posted in comment #3 about KPMG being fired and Aurther Andersen being hired by a company that is on the ropes financially. Again, I hope you are right.
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