Enron Trial Serves as Warning to the Wayward

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As the trial of Enron founder Kenneth L. Lay and former president and CEO

Jeffrey K. Skilling progresses and high-profile witnesses like ex-finance chief Andrew Fastow take the stand, their legal fate remains uncertain. But the Enron debacle is Exhibit A for an issue still roiling Corporate America: excessive, unwarranted executive compensation.


Enron collapsed in spectacular failure and bankruptcy, yet during the five years between 1996 and 2000, Enron paid its top five executives beginning with Lay and Skilling more than $500 million.


Recently, the SEC took welcome steps to force publicly traded companies to do what they should already be doing: disclose executive compensation clearly and completely. It’s not enough.


Our capitalistic system , the source of our success and strength, the best system humans have devised to deliver the most benefits to the most people , depends on trust. And these days, trust is in short supply.


Enron, WorldCom, Tyco, Adelphia and other corporate implosions are extremes, but they highlight an increasingly common, amoral, me-first focus among all too many of our executives: amassing personal wealth, rather than building sustainable companies.


A creeping entitlement mentality has taken hold regarding pay and benefits at the top of too many of our corporations and, indeed, many non-profits and government bodies, too. This pay-and-benefits bonanza for a select few is beginning to feel like cheating and self-dealing and not the fulfillment of the American Dream. It is an acid destroying the fabric of our social harmony and likely to become explosive in coming years as more Baby Boomers reach retirement without their pensions, medical benefits and inadequate savings. As a group, they may become angry citizens looking for retribution only this time as voters or jurors rather than street protesters as they were in the 1960s.


Suffice it to say, it’s doubtful Americans will look back on today’s corporate leaders and write coffee-table books, “greatest generation” odes to their wisdom, sacrifice and foresight.


How did we get here? Nearly 40 years of uninterrupted peace and prosperity have made our nation complacent about the ethical underpinnings of our economy and our way of life.


The ruthless domination of turn-of-the-century Robber Barons and stock speculations of the Roaring Twenties crashed into the worst economic slump in American history. And yet, out of the ashes of the Great Depression and World War II came a clear-eyed, sober generation who knew what it meant to almost lose the nation’s economy and freedom.


Today those ethical challenges and the painful lessons learned are but a distant memory. We seem to have lost our way once again, forgetting that unethical conduct inevitably leads to failure. Put bluntly, we have forgotten that our ability to continue being a self-governing economy and society depends squarely on our ability to follow certain clear, established rules of ethical conduct based on Judeo-Christian principles.


Even as trust in American big business ebbs, many tin-eared business leaders complain about the expense and time required to comply with Sarbanes-Oxley corporate accounting rules passed in Enron’s wake. The business community has only itself to blame. To avoid further laws restricting business operations, companies must reform themselves.


Continuing to pay CEOs and top officers like royalty while telling the rest of the workforce to do without medical and pension benefits is akin to monarchy and we know how the French revolution turned out for Marie “Let them eat cake” Antoinette. Left unchecked, outrageous salary and benefit inequities will provoke a backlash of some sort perhaps draconian government solutions that damage our global competitiveness, or worse.


But it doesn’t have to come to that. The U.S. has a system based on trust, self-regulation and self-government that’s unique in the world. In the 21st century, ethics is likely to be our key competitive advantage because a self-governing economy and society like ours can adapt with lightning speed to changing conditions.


Viewed that way, the Enron trial is part of our nation’s self-correcting mechanism in action.


However, this trial is also a warning to any boards of directors who fail to mend their overly-generous executive compensation ways. Directors are fiduciaries who may be held accountable in the next wave of trials over corporate flame-outs like Enron. Only this time around, they may be asked to bring their own checkbooks to pay damages.


There’s little doubt we want to preserve and enjoy a self-governing economy and society. Let’s hope directors wake up to their responsibilities and rein in executive pay before it’s too late.



*Linnea Bernard McCord is associate professor of business law at Pepperdine

University’s Graziadio School of Business & Management, and is a member of the California and Texas bar associations.

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