The corner office as a hot seat

May 31, 2006

Last week's Enron verdict marked both an end and a beginning. By holding the once-proud company's top two officials liable for engaging in illegal activities, and then lying about them, it reached an important conclusion. But it also set a vital precedent.

Nearly five years after Enron went from No. 7 in the Fortune 500 to bankruptcy, and after a four-month trial, jurors had no trouble making up their minds: Both founder Kenneth Lay and chief executive Jeffrey Skilling were guilty on numerous counts of conspiracy and fraud.

The long-awaited decision sums up recent successful prosecutions against wayward business executives, including Bernard Ebbers of WorldCom and John Rigas of Adelphia, who were convicted of fraud in bankrupting their companies; and Martha Stewart, who served five months for lying about a stock sale.

The verdict also brings some closure to thousands of aggrieved former Enron employees, who lost their jobs and retirement savings. With this criminal case decided, and unlikely to be overturned on appeal, they now have a better chance of winning civil suits against the company, even if they eventually receive only pennies on the dollar.

The trial also proved that top executives, no matter how deep their pockets or how skillfully defended, could be successfully prosecuted. Corporate czars cannot simply plead ignorance of company wrongdoing. As Harvey Pitt, a former chairman of the federal Securities and Exchange Commission put it, the Enron verdict "demonstrates to everyone that the 'three monkey' defense is dead, namely I didn't see anything, didn't do anything, and I certainly didn't understand anything."

It seems likely that some other executives who are tempted to stray may be scared straight. But a few high-profile trials won't end corporate corruption. Prosecutors may be energized by this success, but they need allies. They include shareholders and boards of directors that demand transparency and accountability. Most businesses, including Enron, have ethics codes. Those rules need to be observed, with the individual in the corner office setting the tone and leading the way.

Though not part of the legal judgment, the trial also highlighted the issue of astronomical executive pay. Mr. Lay received some $250 million in compensation during his 17 years at Enron. This included some $20 million in company stock that he quietly sold while telling his employees that their stock was undervalued.

Jurors were also reminded of Lay's lavish lifestyle, his many luxurious homes and expensive vacations to the Riviera, Aspen, Colo., and Mallorca, Spain. While conspicuous consumption is no crime, his stood out in uncomfortable high contrast against the tragic stories of employees and shareholders who had believed in him.

The Enron debacle's most enduring legacy may be the Sarbanes-Oxley law passed by Congress in 2002 to improve business accounting. External auditors, for example, now can't serve in the conflicting role of company consultant. And executives must vouch in writing for the accuracy of their company's books and face prison terms if they're wrong.

The Enron moral? If you bend the rules to earn the big paychecks, be ready to face big consequences.