Enron's board should have known better
WALTHAM, MASS. — The failure of corporate governance was at the heart of Enron's collapse. The role of Enron's board of directors was to oversee how profits were made, as its members are the ultimate arbiters of the company's ethics and integrity. Perhaps Enron's board now wants to correct its deficiencies. This would be our report to them:
Dear Enron Board of Directors,
While you have finally decided to pay attention to your role in upholding the ethical standards of Enron, you probably realize that board attention to ethics must happen before bad things happen, not after. But it's never too late to learn.
Ethics and integrity start at the top. That means you. We urge the board to establish its own ethical code of conduct, although this might mean eliminating a third of your members. Consulting contracts, charitable contributions, service on boards that do business with Enron, and any position that would raise the appearance of a conflict of interest would be prohibited. Such a code should include provisions about when, if ever, an active board member could sell stock.
Enron already has a code of ethics and stated core values. But words alone are meaningless unless they are accompanied by real commitment and oversight. The mere existence of board audit and corporate governance committees doesn't ensure a company's commitment to ethics.
If you were serious about ethics, you would not have considered "waiving" your code of ethics to permit a blatant conflict of interest with the outside partnerships that you approved - partnerships that did millions of dollars worth of transactions with Enron, yet were run and partially owned by Enron executives. Ethics and values need to be thought of like the Constitution: inviolable. Values - not people - must govern how the company is run, day in and day out.
Had the board shown ethical leadership, you would not have allowed executives to hide critical financial information from regulators, analysts, and shareholders, since your own stated company values include "communication" and "integrity." Your chairman would not have been allowed to blithely assure employees that the company was in solid financial shape and urge them to keep buying stock when others knew and acted differently.
You would have noticed that your chairman's Nov. 13 letter to vendors and contractors touted Enron's "highest ethical standards" at a time when Enron's ethical failures were well known by the general public. An ethics infrastructure would have already been established that would have allowed Sherron Watkins, the letter-writing whistleblower, to come directly to the board instead of the chairman, and the board would not have given her letter for investigation to the same law firm that worked for Enron and helped structure the partnerships.
Finally, legal compliance programs or social-responsibility initiatives should not be confused with business ethics. We know that Arthur Andersen reviewed Enron's internal controls and compliance programs and assured you that they were fine. But compliance programs alone do not help employees resolve situations that can't be found in the rulebook.
The fact that a proposed action is legal does not mean it is right. Social responsibility focuses on doing good in the external world. While environmentalism, philanthropy, and volunteerism are important, they are not to be confused with business ethics, which prevents harm and avoids risk within the corporation. Business-ethics initiatives include ethics training, company-wide ethics committees, and resources for assistance and registering concerns. In other words, structures and strategies are needed to develop an internal ethical culture that will guide ethical business activities.
We suggest you start by reviewing what the best American companies have already established and appointing a senior ethics officer who will report to the chairman and the audit committee of the board of directors. We look forward to welcoming your new appointment in the national Ethics Officer Association so that Enron will benefit by the research, materials, and experiences of other companies who are already leaders in business ethics.
We hope this has been helpful.
W. Michael Hoffman is the executive director and Dawn-Marie Driscoll is an executive fellow at the Center for Business Ethics, Bentley College.