As blame gets parceled out for the Enron disaster, one critical question has gone unanswered: How much did the company's general counsel, James Derrick Jr., know about Enron's problems? Until his resignation in March, he was Enron's top lawyer, in charge of telling other executives what was and wasn't legal. Though Derrick would appear to be a big target, so far he has managed to avoid the harsh criticism that has been leveled at former Chairman Kenneth Lay and former President Jeffrey Skilling (see BW, 12/23/02, "What About Enron's Lawyers?").
A distinguished-looking 57-year-old, Derrick joined Enron in 1991 from Vinson & Elkins, the energy giant's closest outside law firm. The department grew rapidly, from 165 attorneys in 1995 to 268 in 2000, according to Corporate Legal Times.
"DOTTED-LINE" REPORTS. Like other high-ranking executives at Enron, Derrick is pleading ignorance. Though he declined to speak to BusinessWeek Online, his lawyer, J. Clifford Gunter, says the ex-general counsel couldn't possibly delve deeply into the details of what was going on at such a vast company. He also notes that the attorneys in the large legal department reported directly to the business leaders of their units -- and had only "dotted-line" reporting responsibilities to Derrick. "It was a very decentralized legal department," says Gunter.
That may well be the case. But it doesn't necessarily absolve Derrick of responsibility for the Enron mess. One high-ranking exec at the company says the decentralized legal department that Derrick established didn't offer enough resistance to the aggressive executives who controlled the promotions and helped set the salaries of in-house attorneys.
"Part of the problem here was fragmented authority," says this source. Adds the exec: "Derrick didn't do his job of asking the right questions. That probably transmitted itself to the outside lawyers."
LEGAL RESISTANCE. The Enron case will likely become part of a long debate in the legal profession about how far inside an organization legal departments should look. One camp still favors decentralization such as at Enron, arguing that the lawyers learn more about the business when they respond directly to operational execs and work alongside them. The other says lawyers should all be on one floor together and report only to a strong general counsel.
Why? Because then they have more power to resist legally questionable maneuvers. Though all the facts aren't in yet, it seems likely that, in the wake of Enron, the "centralizers" may get the best of this argument. By Mike France in New York