Friday, May 26, 2006

Enron, Worldcom, et al: Innovation vs. Total Prevention of White-Collar Crime

I suppose I have to write something about the biggest business news story on the planet yesterday- the convictions of Jeff Skilling and Ken Lay for their Enron crimes.

Here's what I find noteworthy on this "morning after."

Watching Sharon Watkins appear on CNBC this morning, I found myself wondering what the cost to our economy will be, in terms of future dynamism and creative growth, from Sarbanes-Oxley?

Several commentators yesterday solemnly intoned how the Enron verdicts provided the matching "bookend" to the decade of greed and excess that was the 1990s. Then, some other pundits, in response to questions from the talking (air)heads on CNBC's afternoon programs about "is this finally the end of corporate wrongdoing and scandals?" noted that all periods of explosive economic activity and growth beget some excesses. Excesses which are typically found, later, to be illegal.

What concerns me is this. Do we know, empirically, that the illegal "excesses" of the 1990s were above-average in the damage they caused? Can anyone really legislate a priori the total proscription of illegal behavior?

Doesn't it really boil down to the ethical values of the CEOs in charge of public companies? Sharon Watkins spoke about being a "whistleblower" with real passion and angst. I've never worked in a company which commited fraud while I was there. But I can attest to the general climate of which Watkins spoke. She told of being pulled aside by Andy Fastow, Enron's CFO, and told to keep her nose out of accounting business that was not her job. She thereupon transferred to another division. Charlie Gasparino then chastised Watkins by asking something like, 'shouldn't you have really done more, gone public, instead of transferring at that point?'

How presumptuous and pompous of Gasparino to be so judgmental. Anyone who's put serious time in with a large company knows that it is far harder to explicitly and vocally tack away from the corporate course and risk dismissal and loss of income, than it is to just find another place to hang out and do something for a paycheck. Nobody who is not independently wealthy, and does not actually commit a crime, deserves to be questioned and judged like Gasparino and a few of his colleagues did with Sharon Watkins this morning on CNBC. I hate to put it this way, but watching her this morning, it was hard not to compare CNBC's treatment of her to a rape victim being asked if she didn't conspire in the crime.

Drawing these themes together, I simply wonder if we are not making Enron, Worldcom, et al, into mountains of larger size than they actually were. Are we sure that, given the business activity and benefits of the 1990s, the consequent damage done by these corporate frauds is historically "excessive?" Their faults were, at bottom, unethical CEOs and sleepy boards. Now, several CEOs will be in jail for a very long time. If this doesn't give pause to sitting CEOs, will Sarbanes-Oxley? Which, as we all know, was not in existence when the crimes for which Ebbers, Skilling and Lay have been convicted were commited.

Our dynamic economy creates explosive, creative growth. Sometimes, things get out of hand. Nobody can stop white-collar crime before it even gets started. Even whistleblowers like Sharon Watkins are sceptically treated after the fact. It's just not philosophically compatible with our American system to presume people guilty of unethical or criminal behavior before the fact. We punish when we find the crime- not before it's commited. And who among us believes you can somehow legislate a person to have better ethics than they already have as they become a CEO?

Let's hope the effect of Sarbanes-Oxley is not to starve our better new ventures of capital in the public markets. Let's hope it doesn't drive creative enterprise into private equity forever, damping publicly-accessible returns for the average American investor. And, most of all, let's hope Sarbanes-Oxley doesn't have a long term dampening effect upon American entrepreneurship, creativity, and economic value creation. Because if it does, we've just handed the rest of the world our heretofore economic leadership on a silver platter.

1 comment:

Lenora said...

The damage done by Enron, et al., can't be quantified because it's largely psychological. It damaged, for a time, people's trust in the system. Was it "worse" than the shenanigans of other eras? Probably not.

I agree the legislation does little in these areas, since as you noted there's no way to know exactly what intricate scams will next be devised. Enron is the prefect example of that -- they devised numerous brilliant and technically legal ways of crerating gigantic "profits." There is no forecasting innovation, irrespective of the motives for that innovation or the post-facto lens through which it ends up being viewed.

And CEOs in jail? It should be a sobering sight for the next potential scam artist, but part of being a criminal is the conviction that only stupid criminals get caught, and that one is of course much smarter than that.

There is no real lasting total prevention. There is an ethical target that can't be legislated or regulated, and which moves a bit over time. Locks only keep honest people out, the old saying goes. Thankfully most people are essentially honest, even those who want to "rule the world," in business terms. So, I don't worry too much about our entrepreneurial landscape, the odd crooks and oversealous legislators notwithstanding.