McKenna 1
In The Wake of Enron: Restoring Public Trust in Corporate America.
Is Sarbanes-Oxley Enough?
Catherine McKenna
Communication 320
Dr. Groff
April 29, 2003
Within a relatively short time, has occurred the events of September 11th, 2001, the resulting war in Afghanistan in pursuit of Osama bin Laden, the dire condition of America’s (and much of the world’s) airlines, the collapse of the Enron and Global Crossing corporations, the expensive war in Iraq, and an economic condition that, at best, can be called a malaise. In a world in which seemingly disparate events are becoming more and more integrated, it is difficult to know where to begin to address the most significant issues. However, perhaps the most illustrative problem, in terms of it’s violation of moral clarity, is the collapse of Enron and what it represents. We are forced to ask: what are the best ways to prevent the corporate activities that sometimes unfairly hurt investors? Are government attempts at prevention, through creating, then enforcing legislation a good answer? If so, how do we do this, yet allow a free marketplace? If regulation is not a good idea, then what is?
The Collapse of Enron
The magnitude of the problem with Enron, the once-mighty energy company, is absolutely staggering. Indeed, Frontline (2001) is not alone in asserting that were there any single corporate giant that best represented successful, global conglomerates of the 1990’s:
…….this would probably be the one….[it] grew from being essentially a gas pipeline company in the 1980s, into the world's single largest energy trader, accounting for around 25 per cent of energy trade in both United States and European markets. Last year, Enron was ranked 16th on the Global Fortune 500 and eighth on the U.S. Fortune 500 (“The Collapse of Enron”, 2001).
For the energy company, the sky seemed to be the limit. Its investors felt flush with their wealth (at least on paper), and for the thousands of employees, many of whom literally had their lives savings tied up in company stock, the future looked limitless in its promise. However, a bright future for the company was not to be. The decline was spectacular---and rapid.
Global Crossing Plummets
The troubles for Global Crossing Ltd., the telecommunications giant, began early in 2002, when members of its board of directors, including former defense secretary William Cohen were sued by shareholders for “allegedly conspiring to ‘pump and dump’…stock, and for allegedly corruptly awarding contracts (Vernon, 2002)”.
What do the causes of the collapse of these two corporations have in common? Well, perhaps the similarity can be found in the words of U.S. Representative Felix Grucci (R-NY): “absolute, unfettered greed” (“Global Crossing Similar,” 2002). Again, the billions lost have profoundly affected the lives and the futures of thousands of investors. Even more sadly those responsible for the situation may well suffer little loss of the privileged lifestyle to which they have become accustomed. According to Representative Sue W. Kelly (2002), chair of the House Committee on Oversight and Investigations, the bankruptcy of Global Crossing, the fourth largest bankruptcy in history, “raises serious questions about current accounting practices, disclosure requirements, and corporate management.”
We need to try to fully understand the scope of the fallout from business failures of this magnitude, though it is difficult. In the case of Global, 9000 jobs were lost, and the New York State Pension Fund is out $63 million (Kelly, 2002). Much more important, perhaps, is the far-reaching impact on investor confidence in an entire industry. Investors am going to be extremely cautious about investing in a field in which a major player has failed so abysmally.
We speak of corporations as if they were single identities—single minds. The truth is that they are made up of flesh and blood people, the overwhelming percentage of whom are people with the same sensibilities and senses of honor and integrity as most people. There are, however, individuals within corporations, who act in ways that ennoble greed and power for their own sake--who seek them as ends in themselves.
It is hard to imagine that company leaders at this level could be so feckless. The CEO of Global, John Legere, spent twenty years in telecommunications, also working for Dell in Europe, the Middle East and Africa. Earlier. He was CEO of AT&T Asia/Pacific. His academic training would appear to be impeccable, with a degree in Business Administration from the University of Massachusetts; an MBA from Fairleigh Dickinson, and an Alfred P. Sloan fellowship, from MIT (Global Crossing, 2002).
In spite of his impressive credentials, during his watch, the financial reporting of the company may have ‘misinformed investors and employees as to the profitability and performance of the company”, which would, of course paint a healthy picture of a moribund company, a picture that would serve to attract additional investors (Kelly, 2002). The investigations headed by Representative Kelly would seem to point to a conspiratorial effort to deceive that involved the management of the corporation, union leadership, and company accountants—all three of whom stood to benefit by an inflated picture of profitability.
Solution
Prevention: A good solution needs to be two-fold. According to Dr. Ray Forbes, of the Graduate School of Business at Franklin University, “prophylaxis is a lot less expensive than correction (personal communication, 2003). We are limited in what we can do to eliminate unscrupulous individuals from the workplace—they are already there. But we can do something about the future. We can do something to influence those individuals who are studying to become business leaders in the future. Dr. Forbe’s point becomes even clearer when one considers his argument that if we are to prevent situations like those which occurred at Enron or at Global Crossing, we must begin by doing “a better job of addressing ethical issues in graduate and undergraduate business schools.” Those whom we train to become corporate leader must be able to focus on ethics. And this focus needs to be pragmatic rather than a study of ethics in the abstract. That is, real-world scenarios, with real-world consequences need to be part of the curriculum.
Correction: What about legislation? What is effective? Cannot legislation serve to help correct an undesirable occurrence once it happens, and cannot the consequences imposed by that legislation serve to deter others?
One legislative solution is the Sarbanes-Oxley Act of 2002. The legislation focuses on accurate and honest disclosure, particularly in terms of accounting, on the part of corporations. The act is a direct result of the aftermath of the collapse of Enron, Global Crossing, and WordCom. It goes beyond stipulating the requirements for accurate financial reporting, correct audits, and disclosure. It lays groundwork for correctly reporting governance procedures and conflicts of interest (Davis, 2003).
Specifically, it:
….imposes the responsibility for meeting these financial disclosure requirements directly on corporate chief executive officers and chief financial officers. Moreover, the act draws attorneys and accountants more tightly into its web of responsibility by requiring them to report evidence of material violations of federal securities laws or breaches of fiduciary, [sic] duties to appropriate company officials. (Davis, 2003)
The law has additional teeth—at least in theory. It allows the Security and exchange Commission to temporarily freeze assets of corporations or board members who are found not to be in compliance with the law (Arkin, & Greensfelder, 2003).
Will such measures help? In cases like these, the best we can hope for is intelligent speculation. But it does seem that enforcement of legislation designed to thwart attempts at duping investors can work.
Thus, we need preventive measures and corrective measures. And as indicated above, in the long run, prevention is much more cost effective. Maintaining integrity will always be a challenge. Very recently, the CEO of American Airlines was pressured to resign after having gotten pay concessions from three of the airline’s unions, while at the same time preparing to give enormous bonuses to his top executives. The problem? He did not disclose this obvious impropriety during the negotiations. This had the appearance of him asking his employees to do something that was the exact opposite of what he and his executives were doing (“American Airlines, 2003”).
We should not forget that among the victims of egregious acts by top corporate officials are the countless corporate officials across the country who do conduct business honorably and ethically. They suffer by being tarred by the same brush.
Conclusion: Corporate Integrity is especially important in these times of uncertainty. But challenges will continue. As businesses continue to be more global, individuals will continue to be tempted by greed—political and otherwise. And as cultures come more in contact with one another, the mores and values that differ from one culture to another, will be a source of problems.
Corporate structures are born in societies of people protected by governments. They do not exist apart from the societies in which they are engendered. Just as they benefits from the legislations that allow them to thrive and profit, they need to be overseen by laws that protect the welfare of the people who fund them, who work for them and who rely upon them for retirement.
References
Arkin, S.S., & Greensfelder, T.A. (2003, February 25 ). Business crime. New York Law Journal. AN: IUC3358472605NYLJ. Retrieved on April 30, 2003, from an email from Academic Search Premier database.
American Airline CEO quits. (2003, April 25). CNN.Com/.Travel. Retrieved April 30,
from http://www.cnn.com/2003/TRAVEL/04/25/american/index.html
The collapse of Enron. (2001, December 8). Frontline: India’s National Magazine, 18, 25. Retrieved on April 29, 2003, from http://www.frontlineonnet.com/fl1825/18251140.htm
The end of Enron. (2002). CNN.com. In-Depth Special. Retrieved on April 30, 2003 from http://www.cnn.com/SPECIALS/2002/enron/
Forbes, Raymond, Ph.D. From a personal interview conducted sometime.
Davis, J.B. (2003, February). Sorting out Sarbanes-Oxley. ABA Journal, 89, 2, 44-51. Retrieved on April 30, 2003, from Academic Search Premier database.
Global Crossing similar to Enron. (2002, March 22) NewsMax.com. Retrieved April 30, 2003 from http://www.newsmax.com/archives/articles/2002/3/21/184158.shtml
Kelly, S.W. (2002, March 21). Opening statement of Chairwoman Sue W. Kelly, House Subcommittee on Oversight and Investigations, Committee on Financial Hearing on: The effects of the Global Crossing bankruptcy on investors, markets, and employees. Retrieved on April 30, 2003, from http://financialservices.house.gov/media/pdf/032102ke.pdf
Global Crossing. (2003). One network: A million possibilities. Retrieved April 30, 2003, from http://www.globalcrossing.com/xml/global/gl_com_lead_jlegere.xml
Vernon, W. (2002, May 8). Clinton democrats sued over Global Crossing. NewsMax.com. Retrieved April 30, 2003, from http://www.newsmax.com/archives/articles/2002/5/7/182014.shtml