- A New Culture of Corporate Governance: "Enron’s unintended commentary on the state of corporate governance produced an important cultural paradigm shift and led to fundamental changes in the way business is done in this country. In the shadow of Enron, not a single major American corporation can afford to ignore the implementation of serious internal compliance systems to detect and deter corruption."
- Safety to Blow the Whistle: "Serious internal compliance programs serve to encourage employees to speak the truth to power – to report conduct that they believe may have cross the line."
- Document Preservation: "Companies have devoted millions of dollars in creating and enforcing document policies that properly ‘hold’ documents in anticipation of litigation."
- More Active Boards: "Boards of directors that often served no more of a check on corporate malfeasance than a grand jury does on a federal prosecutor are newly emboldened to display true oversight and backbone."
In describing Enron’s legacy, Weissmann is clearly using the word "Enron" both to refer to the Enron criminal prosecution and as a shorthand for all of the corporate scandals and their repercussions. Weissmann is absolutely correct about the changed governance culture. This cultural shift has affected not only the board rooms of America’s largest companies, but the effect has also extended to private companies and even nonprofit entities. And Wiessman certainly is correct about the heightened independence of corporate boards. According to the National Association of Corporate Directors (as quoted in the Wall Street Journal, here, subscription required), 83% of boards said that more than half of their directors are independent, up from 54% in 2000. The increased predominance of independent directors clearly has shifted board participation away from the passive nonconfrontational approach that may have prevailed in the past, toward a more active and even distrustful dynamic.
But in addition to claims Weissmann has made for Enron’s legacy, I would add a few additional considerations, assuming for the sake of discussion that the term "Enron legacy" encompasses the effects of the entire wave of corporate scandals:
- CEOs in the Hot Seat: There is no doubt that as a reaction to the wave of corporate scandals CEOs’ hold on their jobs is far more precarious. By way of illustration, since early 2005, the boards of some of the country’s larges companies have ousted their CEOs -- including Bristol-Myers Squibb, Fannie Mae, Pfizer, Merck and American International Group. In addition, there has been intense scrutiny of executive compensation, including most recently the phenomenon of backdated options. More active boards and a great willingness to challenge management, as well as a changed regulatory environment, have all contributed to this effect.
- White Collar Crime Enforcement Apparatus: Enron begat the Enron Task Force. Even though the Enron criminal trial itself is nearly played out, the Enron Task Force itself has no plans to disband. U.S. Deputy Attorney General Paul McNulty, the current head of the Corporate Fraud Task Force, was quoted in the September 2006 issue of CFO Magazine (here), as saying that the Task Force continues to find activities to investigate and prosecute. In the same vein, the SEC Enforcement Division’s budget was dramatically increased in the Sarbanes-Oxley Act. There is no movement to shrink that budget back down. So one of the most concrete legacies of the Enron era is the permanent structure of prosecutors and regulators focused on corporate malfeasance.
- Hardball Prosecutorial Tactics: The wave of corporate scandals and the subsequent criminal proceedings has institutionalized a host of aggressive tactics for white collar crime prosecutions, including, for example, the obligatory "perp walk;" the use of threatened charges against family members; and the compulsion of corporate investigatory targets to cut-off support for employees who assert their constitutional right against self-incrimination.
- Increased Severity of Civil Securities Fraud Lawsuits: There is no doubt that the average settlements of securities fraud lawsuits has escalated enormously from the civil cases arising out of the corporate scandals. It may be that the egregiousness of those cases drove an increase in average severity that will diminish once the worse cases have played through the system. But while average settlements may decline, the rough idea of "what cases like this settle for" has been ratcheted upwards in a way that is unlikely to completely go away.
There are other potential legacies of the Enron era. For example, evolving notions of appropriate sentences for white collar crime are being sorely tested as the various defendants receive their prison terms. It is also possible that Andrew Fastow’s success in using his cooperation with the civil plaintiffs’ attorneys in order to support his plea for lenience in his criminal sentence (discussed in a prior D & O Diary post, here), will engender increased collaboration between criminal defendants and the plaintiffs’ bar.
In some respect, Enron and the wave of corporate scandals is still too recent to be certain of all of its legacies and consequences. But there is no doubt that the environment of corporate conduct has been dramatically changed, and there will be no going back.