02 Feb 2002  What Do YOU Think?

Will the Societal Effects of Enron Exceed Those of September 11?

Summing Up

The question of the relative societal effects of the Enron case and the September 11 attacks elicited some of the most heated responses received to date. But where there was heat, there was not necessarily fire—that is, if clear direction and agreement represent fire.

Respondents were nearly evenly divided on the question. However, several arguing for the relative importance of September 11 expressed concern that the question was even asked. Keith Sawyer remarked, "Rubbish... As Bush says, this war has no end in sight, and we have scarcely seen the beginning." Joe Hill's remark was typical of several, when he said that the question is "not only ridiculous, it is offensive." Martin Edie added, "There is simply no comparison between these two, except as an intellectual exercise; one that, in my opinion, is not only insensitive, but not very well considered."

Among the many commenting on the Enron case, nearly all felt that change was warranted but few believed that significant change would come from it.
—James Heskett

On the other hand, remarks typical of those arguing for the relative importance of the Enron scandal included: "While terrorism tends to rally folks to patriotism, corruption does just the opposite, and that damage is severe and incalculable...a meltdown of confidence in our system is potentially far more devastating." (Mark Montgomery); "The most striking difference between the Enron scandal and the terrorist attack ... is the realization that the destabilizing effects of the Enron scandal come 100% from within our own society..." (Bob Donlan); and "The most significant difference I see is the response of our government. We should treat the Enron executives as aggressively as we have al Queda" (Mike Donahue).

Among the many commenting on the Enron case, nearly all felt that change was warranted, but few believed that significant change would come from it. The general sense of these comments was that investors, by punishing companies with impossible-to-penetrate and hard-to-understand financial accounting, hold the greatest hope for change. But these very investors were generally characterized as having both short memories and a high level of greed, not very promising characteristics for leaders of change. As Stephen Robbins put it, "History doesn't suggest that much will happen except perhaps a best-selling novelization and a major motion picture starring Richard Gere as Lay."

The sense of most comments received was that while the intent of the perpetrators of the September 11 attacks bore no resemblance to that of those behind the Enron scandal, the damage that each did to levels of trust in our society was substantial. As a result, their implications for us are of comparable magnitude, suggesting that Enron be of more than passing interest. If so, what kinds of responses, especially to the Enron case, are warranted? Who should make them? What do you think?

Original Article

There are striking parallels between September 11 and the collapse of Enron. Both events involved widespread destruction of trust and its attendant costs. Both have now involved the loss of human life and disruption of the lives of thousands of families. And when the Enron case is finally litigated, we may conclude that both involved criminal behavior.

The comparison of loss of life and criminal activity between the two is so forced as to appear not only insensitive but also positively asinine.
—Joe Hill

MIT economist Paul Krugman argued recently in The New York Times that "in the years ahead Enron, not September 11, will come to be seen as the greater turning point in U.S. society." Although some might argue the point, a case can be made that events following September 11 have not confirmed our worst fears at the time. Those of us who did not lose loved ones or even acquaintances have learned to live with inconveniences that are somewhat less than truly life-altering. We have even learned how to act differently in the case of further attacks.

There is an old saying that things are never as bad or as good as they at first seem. If you believe that, you've got to believe that some good always accompanies the bad and vice-versa. For at least a period of several months, September 11 has united Americans and others against a common enemy, brought families together, and encouraged many to reappraise their lives.

Ironically, the most immediate outcome from Enron will likely be the enrichment of the very professions that contributed to the mess. First, there will be the obvious windfall of extra legal fees from Enron and related cases. Then it is quite likely that the accounting profession will be enriched permanently through higher auditing and related fees more willingly paid by anxious directors. Insurers too will enjoy increased business and higher rates.

But will we see other positive fallout from Enron? If so, what form will it take? Will investors finally gain access to the kind of data that will provide insights into the quality of corporate profits? Will the work of business-related professions, with or without outside oversight, adhere more closely to relevant codes of ethics? Will directors reassess the seriousness of their roles and act more responsibly? In fact, will we one day look back on Enron as a useful chapter in American business, law, and government? In fact, will Enron one day overshadow the events of September 11 as a turning point in U.S. society? What do you think?

Comments

    • Dr. Baragur V. Krishnamurthy
    • Professor Emeritus, Institute for Technology & Management, India

    The Enron collapse is a grim reminder of the consequences of personal greed getting the better of public good.

    Day after day, we teach young people who one day might become the leaders of the corporate world, that their role as managers is that of trustees of public wealth and that they must discharge this onerous responsibility with integrity.

    Yet, when confronted with cases like Enron, we find it difficult to convince students that these are exceptions rather than the rule.

    Enron also opens up a Pandora's box in relation to ethics. While the focus is now on managers and accountants, other professions also need to do a lot of soul-searching. It is worth noting what Jesus had to say: let the one who has not sinned cast the first stone.

    History is as replete with failures as it is with successes. We do not seem to learn anything from these experiences.

    In the short-term, Enron will be in the headlines, although for all the wrong reasons. In the long-term, however, I believe that it would be just another addition to the list of human failure—no more, no less.

     
     
     
    • Charlie Cullinane
    • VP/GM, Everbrite

    The Enron debacle has put public accounting firms on notice. One positive aspect of the Enron incident is that the 'partnerships' between the CPAs and their clients will now be under closer scrutiny. Hopefully the accounting firms will now do their 'due diligence.'

     
     
     
    • Greg Stachura
    • Sales, GSA International, Ltd.

    History repeats itself because the nature of man does not change. Cato's letters, written in 1721 told the tale of a very similar circumstance of stockjobbers swindling the people. The wanton desire in the nature of men for quick riches, whether as a shareholder or as a corporate manager, exposes us to such injury.

     
     
     
    • Bob Donlan
    • Unemployed-"Telecom Fallout"

    The most striking difference between the Enron scandal and the terrorist attack, besides the staggering number of innocents killed in NY and DC, is the realization that the destabilizing effects of the Enron scandal come 100% from within our own society, and what's more, from within our highly coveted Capitalist machine.

    A simple analogy that comes to mind involves an apple. What happens when you drop your apple? It bruises. The perpetrators of 9/11 caught us unprepared, and we dropped our apple. What happens, on the other hand, when you discover, while eating the apple, that it contains a worm? Enron feels like the worm.

    Overly simplistic, sure. However, my point remains that we cannot always control the ire that our capitalist system and prosperous lifestyle will conjure up in some regions around the world, nor can we know when or how our enemies may strike at us. We cannot be watching all the time, nor can we accurately predict the geopolitical consequences of often-misguided American foreign policy, coupled with the wholehearted discontentment of bellicose, fundamentalist nations. I'm sorry so many of them have so little. What can I do?

    On the other hand, I know what I can do to minimize my exposure to another Enron: Read the fine print, and do my homework.

    We can, and must control the worm, that has been unleashed within corporate America—unregulated greed.

    I still can't get over the fact that Enron didn't pay taxes for four out of the last five years. That is certainly adding insult to injury.

    Apparently the terrorists were sophisticated enough too, to manipulate our capital markets by shorting airline and insurance company stocks. Once again, a slap in the face and kick in the you know what.

    What a tough year it's been. Do we deserve this? I suppose that's beside the point. Can we fix it? Now there's the real question.

     
     
     
    • Richard A. Eckel
    • President, Systems Synergy, Inc.

    The level of hubris to even suggest this comparison is shocking.

    Scoundrels and swindlers will always be attracted to money, and the world will always stand in awe of the scoundrel's ingenuity and the custodian's gullibility. Mr. Krugman should consider all the previous financial and political scandals that have gone before Enron, and the legislation and oversight that resulted from those events. From the Railroad Baron days through Teapot Dome, Ponzi, Keating, and Milken, financial shenanigans only served to stratify the criminal into that old boy network of CEO, COO, CFO, and the boardrooms, where the real money is. Truth is, nothing has changed to stop the big financial "tragedies" and there is nothing to indicate that this time will be any different.

    The hint of professional failure seems far-fetched. Lawyers and accountants are not the captains of industry; they provide insight and opinion rather than direction. Nor will directors change their rubber stamp attitudes while boards continue to be inbreed bastions of barely contained admiration societies lead by the very person they are tasked with controlling: CEO & Chairman of the Board. This was a simple case of corporate governance failure in the face of multiple opportunities and warnings to right the "sinking ship". In essence, leadership and trust were/are well positioned for failure.

    Real people perished on September 11 at WTC. Not from the selfish actions of a few miscreants, but from irrational actions unimaginable for real people. Random gratuitous violence will stick with populations because it's unpredictable and indefensible. We remember the violence like Titanic, Pearl Harbor, Flight 103, assassinations, horrific crimes, and killer weather. These are risks people cannot predict and statistically not survive. We are not in control of events and tremble with fear for our lives, so changes are made in our lives to avoid those risks.

    If there is a lasting change to the "Business" world, it will be the dispersal of organizations. Business will no longer consider functional concentration a benign form of the "economics of scale." There is little practical need to concentrate people and the value equation for centralization has radically changed. Decentralization is the order and direction of the day, fanning industries over ever-widening distances and redundancies to maximize survivability trends that started with Y2K. This is not a manifestation of a fear of Enron-like failures.

     
     
     
    • Rebecca J. Hubble
    • Adjunct Faculty, Philosophy, St. Leo University, Norfolk, VA

    Your article confirmed my own assessment of the situation. I brought it up for discussion in my Business Ethics class last week and encountered lots of skepticism. Of course, although most of my students are business majors, most of them are also connected to the military. It will be fun to discuss it again this evening.

     
     
     
    • Mike Donahue

    I believe the collapse of Enron is no less of an attack on America than September 11th. The executives motivated by greed and excess at the expense of their employees and the American public, is no different the Al Queda sending their own people to their deaths for a misguided cause. The executives at Enron mercilessly froze employees' savings while they cashed out before the stock was worthless.

    The most significant difference I see is the response of our government. We should treat the Enron executives as aggressively as we have Al Queda. These individuals should be arrested, interrogated and most importantly have their assets frozen. If they are found guilty of wrong doing their assets should be placed in a pool for redistribution to employees who lost their life savings and jobs.

     
     
     
    • Martin Edic
    • President, Powertango Media, Inc.

    Enron encompasses the loss of artificially inflated paper assets that never existed in the real world. While it may not seem that simple to workers who lost their assets, the reality is that those assets were never worth more than a fraction of their apparent worth. Contrast this with the incalculable actual losses of 9/11: human life, physical losses, psychological loss, and financial reverberations that dwarf the Enron debacle. There is simply no comparison between these two, except as an intellectual exercise; one that, in my opinion, is not only insensitive, but not very well considered.

     
     
     
    • Anonymous

    The Enron affair may not end up being a turning point in the long run, but in my view it has shaken one of the pillars that support the American business and financial systems, and indeed our way of life: Confidence.

    The facts in the case of any given corporation, or even the entire marketplace, may well paint beyond any logical doubt a rosy picture of the current situation and future prospects. Unfortunately, a cheerful outlook and all the supporting data the CEOs and accountants can pile up mean nothing if we as a nation do not have confidence in our system.

    Call it improved access to information for investors, tighter adherence to ethical standards, or whatever you like, but what really needs to come out of this is strong efforts in applying the hard lessons of Enron by the people in positions of trust in the business world. They need to work hard to retain, and in some cases regain, our trust and confidence. If ultimately we lose those, we've lost everything...and that's a turning point we don't ever want to experience.

     
     
     
    • Denise Silber
    • Founder, Basil Strategies

    I am an HBS MBA (1979). During Kim Clark's recent visit to Paris, I asked him his opinion on Enron, which I have been following closely through the U.S. press online, as I reside in Paris. I fully agree with Paul Krugman and Prof. Heskett. While Sept 11 initiated a transcontinental religious war between radical Islam and the infidels, as they would define us, the Enron debacle places us all as live actors of a Biblical allegory about the evils of temptation. Will the very underpinnings of the Western capitalism be affected? Do not the relation between shareholders and public companies, their lawyers and accountants...constitute those underpinnings?

    What about the relation between government, political parties, and business? Who is not affected? Which institution is not affected? Yes, this is more important than 9/11 and it is happening at a very unfortunate time, because this event underlines the fact that (almost) no one can indeed cast the first stone. And that the definition of "evil" is perhaps not for man to make.

    This letter to the editor is far from a business case, or is it? Have we now learned the error of separating disciplines? Philosophy, Ethics, Civilization, all are part of what a business manager needs to know in her decision-making processes.

     
     
     
    • Anonymous

    I think the congressional hearings will last too long in order for would-be reformers to take advantage of public outrage as impetus for legislative action. Nor is the limited SEC budget or lame response of Harvey Pitt a cause for optimism as regards the potential for increased oversight. If reform comes, it will come from companies themselves—but only if investors continue to punish corporations with "complicated" balance sheets, thereby providing an incentive for transparent and unconvoluted accounting practices. The faster investors' memories fade, the faster these self-imposed reforms will fall by the wayside. The likelihood for significant and lasting legislative reform or increased SEC oversight would only improve if a second Enron-type scandal were to emerge within the next year or year and a half. Optimists have a tendency of underestimating just how much it takes to jolt people into making profound changes.

     
     
     
    • Keith Sawyer
    • Managing Director, Alpha Omega International Limited

    Rubbish. The events of September 11 have ushered in the realization that Islamic fundamentalists will stop at nothing to completely overpower the United States. As Bush says, this war has no end in sight, and we have scarcely seen the beginning.

     
     
     
    • Stephen Robbins
    • President, VentureCoach, Inc.

    I would love to believe that Enron will make a difference. But I don't. Enhanced ethics? Sounds great. It won't happen. Better corporate governance? Nice theory. History doesn't suggest that much will happen except perhaps a best-selling novelization and a major motion picture starring Richard Gere as Lay.

    The excesses of the '80s (remember those? only fifteen years ago) were supposed to bring more rigor and oversight to the stock market. Uh huh. And exactly how many billions did the public lose into the hands of a "rigorous" financial community a mere ten years later, as it gleefully offered them stock in worthless companies with no business model, incompetent managers, and no future prospects? If that's how capital markets learn lessons, then perhaps we should dispense with lesson learning as soon as practically possible.

    Perhaps auditing firms will bring sanity. But why should they? Auditors have no incentive except reputation to catch wrongdoing. They're paid by those they police. Neither they nor their clients nor the boards of directors benefit from highlighting irregularities. As long as it doesn't become public knowledge and tarnish their reputation with investors, auditors can win business by making their clients look as good as possible. If the firm collapses, the poor auditing will become public knowledge. But otherwise, keeping irregularities hidden benefits the firm and brings more business to the auditors. And even if they do right 99% of the time, once they've looked the other way one time, auditors can't blow the whistle without implicating themselves as accomplices in the previous "overlooking."

    Will Enron increase corporate ethics? Having researched ethics in the past, I believe it's pretty accepted that most ethical behavior is set in stone by adulthood. You can scare folks into playing by the rules for a while, but face facts: Unethical behavior was hugely, obscenely profitable for Enron's upper management and their business service firms. And without penalties serious enough to cancel out that benefit plus take a severely punishing toll, I can't imagine Enron will even cause a blip on the business community's ethical radar. Remember: Milken and Boesky served time in country club prisons and after [paying] fees and penalties, still emerged billionaires. In a world where "Survivor" gets people to eat bugs, live in squalor, and back-stab each other on national television for a one-in-ten chance at a million dollars, it's hard to imagine much voluntary restraint around the chance to make hundreds of millions at the cost of somewhat relaxed ethics.

    And will Enron affect corporate governance? Again, maybe for the next six months. But corporate governance has no teeth as long as directors' liability insurance effectively relieves them of the burden of competent oversight. I'm sure there are a lot of boards with extraordinarily committed, motivated members. But without incentives and punishments to enforce it, competent governance will remain an optional, though desirable, characteristic of a board of directors.

     
     
     
    • Mal Nechis

    In the short term there may be some positive effects of the Enron mess. Significant impact will require significant changes in several domains—all requiring some control of the free flow of money.

    In public corporations, directors are paid well (both directly and indirectly) and, except in the case of specific direct felonies, they are well insulated by insurance from lapses in fiduciary responsibility.

    Corporate officers are well insulated by board selection, rewards to directors, and the fact that they populate each other's boards.

    The professions-legal, accounting, banking, investment banking, etc. (many populated by Harvard graduates of all schools) will always find ways to milk the system. And the politicians of all parties and at all levels.

     
     
     
    • Mark Montgomery
    • CEO, GWIN LLC DBA KYield

    This is timely for me because I started an op-ed last week on the similarities and relationships between these two events, terrorism and business fraud, ending with the question: Which is actually more destructive to the U.S.?

    I don't attempt to provide an answer in my draft, but I think that the latter [is more destructive] potentially is for several reasons...at least in the near term.

    1) Terrorism is by intention very visible. Unethical and especially illegal business practices are almost entirely hidden from view. Every time any agency shines a light on Wall Street, they have found enormous white collar crime including every major investment bank, brokerage house, numerous accounting firms. Every aspect of publicly traded securities is riddled with fraud.

    Don't know what people are thinking but many large corporations use the same accounting strategy Enron was based on (much of which is legal). Microsoft & Cisco for example, hadn't ever paid any income taxes as of a couple years ago and most investors think it's just dandy. In their case it's absolutely legal, but also undermines confidence in the entire system.

    Now Gates is at the WEF saying that we need to spend ten times as much on foreign aid? Creating welfare-type charities worldwide is only attacking the symptoms.

    Liberty is at the core of this issue. Anyone watching the Superbowl pre-game show yesterday, if they were paying attention, was treated to the reading of our Declaration of Independence. I submit that we have become hypocrites.

    The problems include the belief, during the past decade, that unfettered and self-regulated is a good idea...only if you want the system to fail.

    I suspect (hope) few are as bad as Enron, at least of that size, but it's just the tip of the polar cap, a collection of icebergs all fused together by years of sub-zero cultural environments, hollow and empty of moral fiber.

    It's part of the entire "me" generation that places "me" above everything else even if the collective mess sinks the ship, which it most certainly will unless adults get to work. Denial is a huge part of the generation's psyche; don't look, don't see...all is grand.

    2) When corruption becomes as widespread as we've seen in this country in the past few years, and make no mistake, it's bigger by far here than anywhere the world now (we are the butt of ridicule worldwide—deservedly so), the damage is impossible to measure.

    While terrorism tends to rally folks to patriotism, corruption does just the opposite and that damage is severe and incalculable. It's guesswork but in the trillions of dollars. Perhaps few lives are directly lost, but countless are ruined due to the culture. One of the trends of deep corruption that you could see happening is when the cream could no longer rise to the top of corporate America (to the extent that it ever could). That alone causes a negative spiral that led to the M&A frenzy and basic open attempted division of the world economy into cartels.

    As many have said before, the greatest threat to the U.S. is the U.S. itself, it certainly isn't a bin Laden. Even a nuke would only [destroy] one city, and systems are being put in place to survive that now. But a meltdown of confidence in our system is potentially far more devastating.

    Having followed these issues for many years now, I often wonder what type of reforms would be imposed on our financial system by an independent IMF-type body? Seems to me that we ridicule other countries constantly for lesser evils, and of course use capital and trade as negotiating leverage for reform measures precisely because their internal systems fail just like ours have. The irony of the situation is likely not lost on the faculty of HBS.

    Hopefully something will finally be done since one iceberg has a spotlight on it, one that melted in a matter of weeks.

    PS: I did not catch Krugman's piece in the NYT, but his credibility quotient is much higher on these issues than most of the op-eds coming from business journals. So too is his track record in understanding/forecasting the global economy. I'd be very careful indeed about betting against his counsel in an archived document.

     
     
     
    • Rita Maury
    • Management/Non profit and graduate student, Penn York Opportunities

    I see Enron as simply another level of capitalism. The capitalism mentality is simple: Make money. Enron was a master at moneymaking. It would not have been able to make money exactly the way that it did if investors and investor/employees had access to knowledge about Enron's dealings. My motto: If it looks too good to be true, it probably is.

     
     
     
    • Joe Hill
    • Consultant, AEA Consultant

    The idea that the Enron debacle will come to overshadow the importance of the events of September 11th in terms of its long-term societal effects is not only ridiculous, it is offensive. My reaction may have something to do with your provocative headline, but more than this it has to do with my sense of humanity. The comparison of loss of life and criminal activity between the two is so forced as to appear not only insensitive but also positively asinine. Shame on you.

     
     
     
    • Neil Winkelmann
    • Technical Services Manager, Anglo Coal Australia - Dartbrook Mine

    I am somewhat bemused that the prospect of higher legal fees, accounting fees, and insurance premiums are apparently considered by Professor Heskett to be "positive fallout" from the Enron collapse. It is more than "ironic" that this is an outcome at all. It is tragic for those innocent employees whose lives have been set back by this event and sad evidence of the accelerating shift in our society from professions and business activities that actually add value to those that merely redistribute it (whilst taking their percentage of course).

     
     
     
    • Shann Turnbull
    • Honorary Associate, APRIM, Macquarie University, Sydney

    The positive fallout from Enron is that it demonstrates to the rest of the world the cancer in capitalism that they can avoid to save democracy. The cancer is created by the absolute power of a unitary board to manage its own conflicts of interest to enrich executives at the expense of other employees, stakeholders, and society at large.

    The solution is clearly illustrated by the U.S. Constitution that mandates a separation of powers. This avoids absolute corruption that arises from the hubris of absolute power inherent in unitary boards. Unless corporate constitutions follow the example of the U.S. constitution, democracy will be degraded around the world because the economic power of the largest corporations exceeds all but a half dozen nation states.

    The U.S. and the U.K. have led the world into adopting an inefficient, insensitive, and unethical form of capitalism. It is inefficient because investors get overpaid. This concentrates the wealth of rich nations and unnecessarily drains host countries of their foreign exchange earnings and consumer spending power. The overpayments arise because there is no limit on the time corporations can distribute cash to investors. As a result, many wholly owned subsidiaries of multi-national corporations pay back their set-up cost many times over after the investment time horizon of the parent company. All post-time horizon cash receipts must represent an overpayment in attracting investment, as by definition they are not required to justify the investment.

    Most Anglophone corporations are insensitive because they are not accountable directly to the people affected by their decisions. In addition they are organized as a command and control hierarchy that suppresses individualism with subservience and conformity.

    Publicly traded companies in Anglo countries are unethical because a unitary board may determine: (a) their own pay and benefits; (b) the appointment and retirement of their members; (c) how shareholder votes are counted; (d) how shareholder meetings are managed; (e) the basis on which experts are retained to value corporate resources and (f) the process of constructing financial accounts within accepted accounting principles. This last feature allows directors to, in effect, set and mark their own exam papers as occurred with Enron.

    The most valuable outcome of the Enron disaster is that it provides former socialist societies, developing nations and others to reject the fundamentally flawed dominant form of capitalism. Within the U.S. and around the world there are many alternative forms to consider that build into their corporate structures a meaningful division of power, transparency, and accountability. This allows self-regulation to replace many elements of government regulation and their attendant intrusiveness and costs for both the public and private sector.

    Start-up companies supported by venture capitalists and LBO associations illustrate a division of power that introduces greater accountability and operating advantages. They reduce information overload by separating strategic and operating decision making as is achieved by a divisional structure in large firms. Professor Michael Jensen in his 1993 article stated that LBO Associations represented "a proven model of governance structure" in his paper on "The Modern Industrial Revolution: Exit and the Failure of Internal Control Systems" presented at my 30th HBS reunion.

    Another way to achieve a positive outcome from the Enron collapse is for HBS to extend my own research into corporate forms that would not allow it to happen again.