Markets & Finance

Ken Lay's Dark, Ironic Legacy


Ken Lay, the disgraced former CEO of Enron who died July 5 at age 64, leaves a legacy of shame. His mismanagement and dishonesty brought down a giant corporation, he was ultimately responsible for destroying thousands of jobs and billions of dollars in employees' savings and shareholders' wealth, and he was found criminally guilty of massive fraud (see BusinessWeek.com, 5/25/06, "Guilty Verdicts for Enron Brass").

Perversely, there's also a remarkably positive aspect to his legacy. In the post-Lay, post-Enron era, corporations are behaving a lot better. Lay's terrible example of how not to run a large corporation helped fundamentally reform U.S. companies' standards of leadership, governance, and accountability.

FOR BETTER OR WORSE. Yes, a lot of the improvement is the result of more intense government oversight—the kind of regulation and enforcement Enron always railed against and which should have been in place so a debacle like Enron was not allowed to happen. And, yes, there is a price being paid: Corporate executives complain loudly that because of Enron and a few other bad apples, public corporations are being forced to comply with a lot of needless rules that are making them less profitable and less competitive.

But to many of us who report on companies, work for them, or invest in them, it does not seem to be business as usual in executive suites and boardrooms. Here are some of the changes that have come about in the last several years:

Not-so-imperial CEOs

Fewer big company bosses are managing in the Lay mold of pushing subordinates to make the numbers work each quarter, the rules be damned. The Sarbanes-Oxley requirement that the CEO sign-off on and accept more direct responsibility for reported results is one reason. The government's effective legal pursuit of Lay and others who committed white-collar crime is probably an additional deterrent.

Less CEO and CFO hype

Lay was a master of happy talk who convinced nearly everyone, including some smart Wall Street money folks, ratings agencies, and media that Enron was for real. In the post-Enron era and with new Fair Disclosure rules, most top executives seem extremely guarded in talking up their companies' prospects.

Independent boards

After watching Enron directors' reputations suffer and seeing some of them take a measure of financial liability, corporate boards have become much more independent and assertive. More boards have nonexecutive chairs, and they are holding more meetings without executives present to allow concerns to be aired freely. Headhunters say it is more difficult to recruit directors because it is no longer just a rubber-stamp job with nice perks.

Auditing is back

Accounting firms have clout again. They're making much more money, they're insisting their clients use better practices and build in more safeguards to prevent errors or fraud, and they're refusing to audit companies that don't meet basic accounting standards. I would argue that the demise of Arthur Andersen, Enron's auditor also wounded by the scandal, is a big reason why the Big Four firms are pickier about the clients they accept.

Tougher ratings agencies and equity analysts

The firms that judge the quality of public companies' debt (including Standard & Poors, like BusinessWeek and BusinessWeek.com, a unit of McGraw Hill (MHP) and the big brokerage companies were badly burned by Enron, in some cases subsequently acknowledging that they didn't fully understand how the energy and trading company made its money.

The Enron collapse—along with other corporate misbehavior and the stock market's dot-com meltdown—has raised skepticism to a healthier level. Ratings and equity analysts have taken many precautions to raise the quality and reliability of their work.

LEAVE IT TO HISTORY. The financial press, which was also generally fooled into thinking Enron was a model of a modern growth company, is generally more skeptical these days of any "too good to be true" business story.

Ken Lay, of course, was not the only catalyst for many of these improvements. And despite the new checks and balances, there will no doubt be future Enron-type transgressions in other companies—although it seems a lot less likely to happen on such a huge scale. Still, it's difficult to think of another chief executive who has had as much impact on the conduct of U.S. corporations and their executives as Ken Lay.


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