Lessons for Enron reformers
ST. LOUIS — It seems almost inevitable that the widespread damage done to employees and investors by the Enron bankruptcy will produce a new wave of government regulation of business. The sheer magnitude of the disaster - as well as the reported shenanigans on the part of highly paid professionals who should have known better - virtually guarantees that Congress will respond with a host of new statutory requirements.
These circumstances warrant attention to ways that will help policymakers write constructive laws and regulations. Some lessons from past efforts to regulate business would seem to be a useful starting point. For example, despite all the talk about "deregulation," the fact is that the sheer magnitude, as well as complexity, of the existing array of regulation is awesome.
Anyone who has any doubts on that score should examine the many volumes of the Code of Federal Regulations. Better yet, just try to read one of the daily issues of the Federal Register. It is an eye opener to see the magnitude and variety of governmental regulations that are issued in a single day.
The most relevant "lesson" is that so often regulatory power is exercised in a manner that generates unexpected - and frequently counterproductive - results. A cogent case in point is the rise of the 401(k) "retirement" plans that are receiving much attention. In the case of Enron, many culprits were involved, not the least of which was the well-intended ERISA (the Employees Retirement Income Security Act).
Congress enacted ERISA in 1974, after hearing dramatic cases of workers losing their pensions after many years of service. As would be expected, Congress responded by enacting a host of statutory "protections." Why make a point of that? Because back in 1974, most company-sponsored pensions were of the "defined benefit" variety, where the employer was on the hook to pay "defined" pensions to its retiring workers.
In retrospect, ERISA exemplified the old notion that "the best is the enemy of the good." ERISA imposed so much paperwork and other costly burdens on employers, that thousands of pension plans were quickly terminated (about 10 percent of existing plans). More important, over the years that followed, companies and other employers learned the benefits (at least to them) of getting out from under the burdens of ERISA altogether by shifting to "defined contribution" arrangements such as 401(k) plans. Under this approach, the employer may set up a retirement plan, but it does not necessarily have to make a financial contribution (such as company stock). Employers using "defined contribution" plans are not responsible for the payment of any retirement benefits. Most company retirement plans are now of the "defined contribution" type and not subject to ERISA!
What should Congress do?
Before it starts to write new statutes, Congress should make sure existing laws are being fully enforced. Judging from widespread media reporting, at least some of the people involved in the Enron fiasco broke the law. To the extent that any of them violated laws and regulations, the extensive law-enforcement and judicial powers of the federal government should be fully utilized to "throw the book at them."
Heavy fines and long jail sentences, when the law calls for them, are a strong signal to the rest of us that the highly criticized conduct is not acceptable to society. Subsequently, after making sure that the country needs some new laws, the Congress should - without the theatrics of recent weeks - sit down in quiet committee sessions and go about the serious business of writing new legislation. Contrary to the standard treatment in the civics books, the actual process of writing laws does not get as much congressional attention as it deserves. Without the TV cameras, many committee members are off doing something else. The result - more often than not - is a hastily drawn law that passes the buck to a regulatory agency.
If that sounds too harsh, consider how frequently new laws written under great pressure are followed a year or two later with a "corrections" bill, trying to fix the mistakes in the first bill.
We also need to take into account the important changes that corporations and auditing firms are now making voluntarily so that they will not have to endure an Enron-like experience. For example, my personal forecast is that - whether or not Congress passes a law on the subject - it will be a very long time before any other company repeats the Enron blunder of hiring the same accounting firms to do both the internal audit and the external audit.
Murray Weidenbaum holds the Mallinckrodt Distinguished University Professorship at Washington University in St. Louis, where he also is honorary chairman of the Weidenbaum Center on the Economy, Government, and Public Policy.