Ethics After Enron 

BECoverThe guilty verdicts were not the end of the story. Only six weeks after his conviction for conspiracy and fraud, Enron founder and former chief executive Kenneth Lay was dead, the victim of a heart attack. Jeffrey Skilling, Lay's successor at the now defunct energy giant, continues to maintain his innocence and has vowed to appeal; nonetheless, he's likely to receive a hefty prison term when sentenced. As the drama plays to its final conclusion, corporate America watches with bemusement and searches for lessons. Is the Enron case a "Verdict on an Era" gone by -- as The New York Times suggests? Or do the "Guilty Verdicts Provide 'Red Meat' to Prosecutors Chasing Companies?" -- as The Wall Street Journal speculates?

There's probable truth in both scenarios. In interviews we've conducted with executives of companies large and small, it's clear that the Enron case will influence discussions and decisions in corporate boardrooms for years to come. Here's a look at some of the lessons already learned -- and how many executives are gearing up to meet the challenges of increased scrutiny and expense, organizational change and a mandate for measurement to help ensure ethics programs are far more than just corporate window-dressing.

New Players in the C-Suite

Perhaps the most noticeable change is in the new roles and titles to which Enron has given life. One of the newest is chief accounting officer.

"Enron has made us all just nervous," says Joyce Bastoli, vice president and regional director of Ajilon Finance Solutions. "CFOs don't want to be blamed for weaknesses in accounting functions, so companies are bringing in this extra layer of management, hiring chief accounting officers to handle reporting and compliance and work with outside auditors. And they have found that their stocks usually rise when they do."

Ajilon, headquartered in Saddle Brook, N.J., provides companies with senior level finance and operations professionals on a project or interim basis. But like many of its clients, Ajilon is cleaning its own house, "enforcing the rules a lot more and not letting it slide when there's no process in place," Bastoli says. In fact, the company recently dismissed one employee for misreporting his key-performance indicators. "We're really holding managers accountable for ensuring their numbers are accurate, and doing more due diligence to make sure the people we hire are credible and ethical."

Steve Skalak, partner in the corporate investigations practice of PricewaterhouseCoopers in New York, agrees that "the whole area of forensic accounting is being pretty aggressively installed in major companies, though the jury is out on whether the measures are worth the cost." In early returns, the data suggest that one area where the return on investment is palpable is the lessening risk of legal actions. There were 168 securities-related, class-action cases last year, down from more than 200 for the first time in 10 years, he notes. According to PwC's Global Economic Crime survey, a company's two most effective investments are in whistleblower access and internal audit.

The big-picture lesson, Skalak says, is that whatever the specifics of a corporate system of internal controls, ethics office and hotline, it's important to constantly reinforce the concept of "We trust our employees but we verify what they do." He suggests a supervisory review by management, scheduled on an appropriate cycle, at all levels of the organization. In corporate governance, for example, that means questioning what management is doing deep in the clerical operations. And it translates into making sure payments for routine goods and services are being properly reviewed at all levels.

Skalak says companies also shouldn't forget one of the most important -- and most counter-intuitive -- lessons learned from Enron and other business- ethics scandals. The old saw that communicating stories of bad behavior only inspires others to try it themselves has proven untrue. "One key best practice in corporate investigations is communicating that you have detected and mitigated a problem," he says. "That has a substantial deterrent effect and is definitely preferable to keeping everything confidential."

For ethics and compliance officers, the most obvious post-Enron trend is the evolution of their job responsibilities into a field in itself, separate from law, human resources and audit. The Ethics and Compliance Officer Association, Waltham, Mass., reports that in the five years since Enron collapsed, the association has grown more than 70%, to 1,260 members.

One ongoing challenge for most compliance and ethics professionals is that they "still don't really have the power to say no to a CEO or CFO," says Joseph E. Murphy, partner in the Compliance Systems Legal Group, Warwick, R.I. Murphy suggests that compliance officers be accountable to corporate boards, not to senior management, with employment agreements that need the approval of a company's full audit committee.

Adding It All Up

Measurement. That's what companies are increasingly looking for with regard to their ethics and compliance programs, partly to determine whether the programs are working but also to tweak and fine-tune business systems and processes in the hopes of recouping some return on the vast sums being spent on post-Enron compliance.

"The new wave is business-process improvement through accurate, real-time reporting," Ajilon's Bastoli says, "looking at how finance can leverage technology to capture efficiencies, savings and activity-based costing, to trace profits and be sure you're running a lean operation."

At Boeing Co., the huge Chicago-based aerospace company, the goal is to "be in a position to see ahead, predict what's happening and get ahead of it," rather than responding after the fact to negative behaviors or publicity, says Martha Ries, vice president of ethics and business conduct. Ries told a packed room at a recent Conference Board conference on ethics and compliance, "We're starting to take our survey data, our H.R. data, data from a number of companies we benchmark within the defense industry and focus-group data, and look at it altogether."

In January, each business head at Boeing identified three key business risks to focus on for 2006. They each get a daily summary report that tracks current cases, backlog, cycle time and customer satisfaction. An internal Ethics Report, posted on the corporate intranet, communicates the disposition of any cases that arise for all employees to see, with only the names of the perpetrators deleted.

Dow Chemical Co., Midland, Mich., is also looking at the numbers and the data, trying to measure how employees perceive it's ethics program. It's also working to develop a standard process and database to identify and track issues, apply consistent discipline or remedial action and eliminate the possibility of double standards based on management levels, says director of global ethics and compliance Tom McCormick.

At PBS&J, a Florida-based, employee-owned engineering firm with 3,800 employees, chief ethics and compliance officer C. Lee Essrig identifies best practices as focusing on risk assessment, measuring program effectiveness and putting a real emphasis on culture and leadership. "The key is to encourage and reward right behaviors instead of punishing after the fact," she says. They're also "relentless about communicating with employees. The point is to breathe life into the program by following through on what you promise."

"Does your company have mandatory ethics training?" she asks. "Is it truly mandatory? What happens to people who don't go?"

The question of over-promising also concerns Lisa Ruca, director of corporate compliance at law firm Holland Knight LLP. "Enron is the perfect example of a window-shelf compliance program," she notes, with a state-of- the-art ethics program and a CEO who talked the talk. The lesson? It's not what you put in your code; it's about how your executives embrace and own the program. "The important thing is to integrate compliance and ethics into the business. Companies don't know how to do that yet, but they have learned that paper programs just aren't going to work. There's more of an emphasis on measurement than ever, even though it's very difficult," Ruca says.

Looking to the Future

In the autumn of 2001, Enron was beginning its final slide into corporate oblivion, taking with it the Arthur Andersen accounting firm and the jobs of thousands of employees. Few could have imagined then what has unfolded since. Certainly no one could have predicted that the financial and business ramifications of the Enron debacle would continue on into the second half of the decade.

Yet that's what is happening. In Washington, the debate continues regarding Sarbanes-Oxley and required levels of compliance, especially for smaller publicly-held businesses. Ajilon's Bastoli predicts a wave of small companies privatizing as their executives simply give up trying to meet the compliance standards. "We'll see a lot of activity in investment banking and M&A in 2007," she says.

But larger companies also will continue to search for efficiencies. "There's no question that investors are better served today than before Enron, and that the system has delivered better processes," says PricewaterhouseCoopers partner Ray Beier. "But the question is, at what cost? I do see where the system has acknowledged that maybe there's too much regulation. What's the balance between regulation and getting things done in the marketplace? That's the debate that will go on. That's going to be one key question for 2007.

Meanwhile, getting the accounting right is particularly important, Beier says. The IRS likely will be looking carefully at how companies account for liabilities in terms of reserves and complex hedging transactions, and whether they account for revenue properly. Executive compensation will draw attention in 2007 -- and so will the role of the board.

And the age-old question will remain: "How do you make sure your people do the right thing? Are your incentives directing behaviors the way you want them directed?"

Former federal prosecutors Chuck La Bella and Thomas McNamara, now white-collar, criminal-defense lawyers at their own San Diego firm, predict that enforcement activities by the Securities and Exchange Commission will continue at the current level, "though federal prosecutions may have reached a peak." Regulators and law enforcement agents have been so aggressive that companies are starting to fight back a little. Still, they note, "the SEC is pooling hundreds of millions of dollars in resources (into) an enforcement apparatus it didn't have five years ago. They have to do something."

Another "subtle aftermath of Enron" is the increased role of the institutional investor. "They're flexing their muscles, and we're going to see more and more of that," LaBella and McNamara predict. Insurance companies and pensions funds are going to demand good corporate governance -- and their involvement "is a much more effective solution than an Enron trial, because they are interested in the survival -- the growth and prosperity -- of companies, and in creating real value."

Smart companies will fine-tune their use of good governance not just to satisfy market analysts but as a public relations vehicle, the former prosecutors predict. "Good corporate governance," they note, "can be as effective a marketing tool as a good quarter."


A Little Light in Portland
Enron may be gone, but its legacy continues in a most unlikely place.

In April, on the same day former Enron CEO Jeffrey Skilling took the stand in his own defense, Enron subsidiary Portland General Electric spun off from its bankrupt parent and made its debut on the New York Stock Exchange. Enron creditors received 27 million newly-issued shares of the utility, or about 43% of its outstanding stock, for a payout worth $568 million. The remaining shares are being held by a disputed claims reserve for future distribution to Enron's creditors -- including the 401(k) accounts of Portland General's retirees.

Portland General, Oregon's oldest utility, delivers electricity to about 780,000 customers. When it was bought by Enron for $3.1 billion in 1997, its pension plan largely remained unchanged -- but its 401(k) plan shifted to Enron securities, which today are virtually without value.

"It's a relief to have the Enron chapter behind us and we're excited to be an independent company again," CEO Peggy Fowler told Business Ethics. Now, the remaining issue is personal, as employees "are still dealing with their 401(k) losses in varying ways and are watching closely how the 401(k) settlements will work out, including if there will be any noticeable recovery of those lost investments."

Some folks have delayed their retirement plans and stayed on longer than they had planned. Others are hoping for a successful outcome to Portland General's efforts to convince Congress to pass catch-up retirement legislation for employees of companies like Enron. Portland General, meanwhile, is offering retirement planning advice and job training for workers who want to move into other areas of the company.

"Most of us have moved on," says Fowler, and certainly her focus is on the future rather than the past. In the works at the newly public utility are an infrastructure investment plan that will add the 400 megawatt (MW) natural gas-fired Port Westward Generating Plant by 2007, and a wind project that will produce 450 MW more, as well as new metering technologies and information platforms to better monitor customers' daily needs.

But the lessons of Enron are not forgotten -- especially not by Fowler. "Would Enron have been different with different people? Probably," she says. "It's important to have the right people in the right jobs, especially when they are key leadership positions. And it's extremely important to protect your company's reputation. It's far too easy to damage or lose your reputation these days -- and far harder to earn it back."

Cheryl Rosen ( crosen2@optonline.net ) is a New York-based freelance
business journalist. This article first appeared in the Summer 2006 issue of Business Ethics, Volume 20, No. 2.