|
|
Get Four
|  | MAY 30, 2006
By Christopher Palmeri It's the Enron EffectThe convictions of executives Kenneth Lay and Jeffrey Skilling send a powerful signal to would-be white-collar criminals -- for nowIt was the time for big-picture reflection. Sean Berkowitz, the Chicago prosecutor who headed the U.S. Justice Dept.'s Enron Task Force, had just won fraud and conspiracy convictions against former Enron honchos Kenneth Lay and Jeffrey Skilling. Standing outside the federal courthouse in downtown Houston on May 25, Berkowitz declared: "The jury has spoken, and they have sent an unmistakable message to boardrooms across the country -- you can't lie to shareholders. You can't put yourself in front of your employees' interests. No matter how rich and powerful you are, you have to play by the rules." The convictions of Lay and Skilling bring closure of sorts to an unprecedented era of corporate scandal (see BW Online, 05/25/06, "Guilty Verdicts for Enron Brass"). But now, with many of those convicted facing decades behind bars, questions remain about the long-term significance of the cases. An earlier wave of financial malfeasance in the 1980s saw prominent Wall Street figures Ivan Boesky and Michael Milken sent to jail. But that didn't stop this recent crime wave. Even today, new scandals are emerging, such as the one concerning the backdating of executive stock options (see BW Online, 05/23/06, "Backdated Options, Future Rules"). "Before, we had the saving-and-loan scandals and junk bonds," says Ellen Podgor, a professor at Stetson University College of Law who has written books on white-collar crime. "Now it's shell corporations. Will Enron deter white-collar crime? Yes. But the question is how far that goes." "SUPERB SALESMEN." It's basic human nature to believe you are smarter than others, particularly if you've had the drive and skills to reach the top of a major corporation. Once you're there, you don't often have a lot of people questioning your decisions, a big problem at Enron, whose top brass considered themselves "the smartest guys in the room," to quote the title of the book and film about the company. "I've found that fraudsters can convince themselves of their own stories, no matter how farfetched," says John R. Fahy, who once pursued white-collar criminals for the Securities & Exchange Commission and is now in private practice with Whitaker, Chalk, Swindle & Sawyer in Fort Worth. "That makes them superb salesmen." There's little doubt that the convictions in these recent cases are significant. In the past, prosecutors rarely sought long-term prison sentences for corporate executives, preferring instead to pursue civil cases and regulatory actions that resulted in fines and settlements. "Having to part with your money is a very different thing than having to part with your time," says Charles Elson, who chairs a center for corporate governance at the University of Delaware's business school. Although white-collar crime reared its head again since the Boesky days, he notes, it did so in a different form. "You haven't had the same kind of insider trading scandal," says Elson. "I think the criminal convictions will have a huge impact." Gregory Markel, who heads the litigation department at Cadwalader, Wickersham & Taft in New York and who has represented bankers and board members in a number of recent white-collar crime cases, says Enron, in particular, will have an effect because the links between Lay and Skilling and the accounting at issue were less direct. In cases like Worldcom, Adelphia Communications (ADELQ ), and Tyco, all of which resulted in convictions, the evidence more clearly showed that the top brass was involved in the fraud. The Enron convictions, he says, "suggest a higher degree of responsibility for corporate executives for what is going on at their company." REGULATORY OFFENSIVE. They already may be having an impact on executive recruitment and tenure. Richard D'Amaro, chairman of executive services firm Tatum, says turnover at the executive level, particularly in the job of chief financial officer, is at an all-time high. The average CEO, chief financial officer, or chief operating officer lasts just three years, he says. That's because Sarbanes-Oxley rules create a mountain of paperwork and compliance issues for publicly traded companies. "They have to be experts in their areas and compliance," D'Amaro says. "You have a recipe for tough jobs to fill." One solution, he says, is that companies are creating an "office of the chief financial officer," divvying up the duties between several people. Possible fallout of the recent convictions could be even more cases being brought against white-collar criminals. "There will be opportunities to play around with your books again," says Peter Henning, a law professor at Wayne State University who has written about white-collar crime. He notes that spending and staffing levels at the state and federal agencies that pursue white-collar crooks is up. That, coupled with the Sarbanes-Oxley legislation passed in the wake of Enron, will present more opportunities for government officials to bring cases. "I think the government will be more emboldened to go after these cases," Henning says. OUT OF THE SHADOWS. One group not so emboldened: CEOs themselves. Jeffrey Sonnefeld, who heads the Chief Executive Leadership Institute at Yale University's School of Management, says he's disappointed that the current crop of "Woodstock era" executives hasn't spoken out more forcefully against the "one or two percent" of their peers who actually engage in bad conduct. "The trade groups, the Business Roundtable, they're all circling the wagons and fighting reform," he says. "Even the most prominent names who sell lots of books on how to lead have yet to condemn this." Privately, though, every CEO he's spoken to since the Enron verdicts have told him they were delighted with the outcome. "This is actually a good thing for Corporate America," he says. "It lifts the veil, the shadow hanging over it." And makes those rich and powerful people that prosecutor Berkowitz was speaking of a little more accountable.  Palmeri is a senior correspondent in BusinessWeek's Los Angeles bureau
BW MALL
SPONSORED LINKS
Get BusinessWeek directly on your desktop with our RSS feeds.
Buy a link now! Add BusinessWeek news to your Web site with our headline feed. Click to buy an e-print or reprint of a BusinessWeek or BusinessWeek Online story or video. To subscribe online to BusinessWeek magazine, please click here. Learn more, go to the BusinessWeekOnline home page  | | |
 Copyright 2006, by The McGraw-Hill Companies Inc. All rights reserved.Terms of Use | Privacy Notice |
Printer-Friendly Version
