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Skilling Sentence Marks Latest Crackdown on Corporate Crimes

October 24, 2006 at 6:30 PM EST
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JEFFREY BROWN: Since its bankruptcy in December 2001, the name “Enron” has come to symbolize an era of corporate fraud. Yesterday in a Houston courtroom, former chief executive Jeffrey Skilling received a 24-year prison sentence, capping a series of high-profile convictions and punishments.

JEFFREY SKILLING, FORMER CEO OF ENRON: So, yes, I mean, of course I feel bad. I feel horrible, but that’s not to say that I think I did something illegal.

JEFFREY BROWN: A federal jury convicted Skilling in May for 19 counts of fraud, conspiracy and other criminal acts that led to the loss of billions of dollars for Enron shareholders and employees. In addition to his prison term, Skilling was ordered yesterday to pay $45 million in restitution.

JEFFREY SKILLING: We’ll appeal the sentence. I think we have a good basis for appeal, but I don’t fault the judge for anything he did today.

JEFFREY BROWN: Skilling was the last of Enron’s top executives to be sentenced. Company founder and chairman Kenneth Lay was convicted with Skilling of conspiracy and securities fraud.

KEN LAY, FOUNDER OF ENRON: Certainly, we’re surprised…

JEFFREY BROWN: Lay died of a heart attack two months later. As a result, last week a federal judge wiped out his conviction.

Ousted chief financial officer Andrew Fastow is already behind bars, serving a six-year sentence that he worked out in a plea deal with prosecutors.

And it’s not just Enron executives who’ve been hit with major prison time. Last year, ex-WorldCom chief Bernie Ebbers was given an even longer sentence, 25 years, for his role in an $11 billion accounting fraud. Also last year, Adelphia Communications founder John Rigas was sentenced to 15 years in prison for siphoning millions of dollars from what was then the nation’s sixth-largest cable company. And former Tyco chief Dennis Kozlowski has been in prison since August 2005, when he was sentenced to eight to 25 years for looting his company.

In addition to aggressive federal prosecutions, the series of scandals prompted Congress to pass the Sarbanes-Oxley Act, which put new accounting requirements on companies and held executives responsible for their accuracy. President Bush signed it into law in July 2002.

In the meantime, even as the recent wave of trials comes to a close, new accusations of corporate malfeasance are coming to light, as the Securities and Exchange Commission investigates more than 100 companies for allegedly manipulating the price of stock options.

Corporations work to stay clean

Nell Minow
The Corporate Library
We continue to see people trying to get around even the new rules and trying to push back, trying to get repeal of the Sarbanes-Oxley, which I think is one of the reasons that the market is so strong right now.

JEFFREY BROWN: So where are we now? We ask that of Nell Minow, founder and editor of the Corporate Library, a watchdog group on corporate governance, and Jeffrey Sonnenfeld, associate dean of executive programs at the Yale School of Management.

Nell Minow, starting with you, have these convictions and new laws had an impact on the way business works in America?

NELL MINOW, The Corporate Library: Definitely. But I have kind of a Dickensian "best of times, worst of times" take on it. I think some things are much, much better. Boards of directors in particular are doing a much better job.

But still, we continue to see people trying to get around even the new rules and trying to push back, trying to get repeal of the Sarbanes-Oxley, which I think is one of the reasons that the market is so strong right now. It restored a lot of confidence. It would be a big mistake to water it down.

JEFFREY BROWN: Jeffrey Sonnenfeld, you deal with many corporate executives. What messages are they taking from these long jail sentences?

JEFFREY SONNENFELD, Yale School of Management: They're taking it very seriously. I'm surprised at how many -- they can draw a bright line in the sand separating their highly ethical conduct from the really atrocious things that we've seen in the last five years and the number of high-profile cases, and yet they still have been able to identify with the pain, the suffering, to be separated from your family for decades.

And this is not to forgive the terrible things that were done to the families and the victims of the investors and employees of these companies, and yet still these are very stiff sentences. They're taken quite seriously. Definitely, as the Samuel Johnson philosopher once said at the turn of the last century, nothing so focuses the mind like the prospect of a hanging. And this has definitely gotten the attention of CEOs that things are serious here.

JEFFREY BROWN: You think it does work as a deterrent to bad corporate behavior?

JEFFREY SONNENFELD: Well, I think it does. I think we're seeing the end of a lot of overt plundering of shareholder wealth. We're seeing, at the same time, a lot of anxiety about trying to play by the rules. Sometimes people do careless things. Driving over here, I had a policeman following me on the bumper. I realize I didn't have my seat belt on. As you try to buckle your seatbelt, you can veer across the lanes and create another problem.

Sometimes boards that have been trying to be very attentive to certain rules can be careless in other ways. In the HP situation, it's ironic that here we have, five years after the scandals broke, Bill Lockyer, the attorney general of California, began his Enron investigations of the market and energy out there five years ago. And now at Enron he has -- with HP has his investigation going there.

But there's no plundering of shareholder wealth. In this case, it was a lot of different, often quite misguided but well-intended, views of trying to actually be better governed. A lot of different parts of the board had different views of the philosophy of governance, but nobody was stealing, and yet we still see board problems.

Going too far with regulation?

Jeffrey Sonnenfeld
Yale School of Management
Inside candidates for CEO positions are disparaged because of a fear of cronyism. And we're essentially undermining elaborate human resource systems for fear it's going to look like it's not diligent if it's a product from within.

JEFFREY BROWN: Well, Nell Minow, this goes to something that a lot of people still wonder about. Five years later, were these cases aberrations or do they speak to something that is more endemic to corporate culture?

NELL MINOW: I think it's cyclical. We see something like this every few years. Just in the last couple of decades, we had the savings and loans scandals; we had the procurement scandals with the Pentagon and the contractors. And, of course, we had the Mike Milken and the other scandals, Ivan Boesky.

So you're always going to find some bad actors, and they're always going to be looking for a way around the rules. I like the fact that Jeff brought up the issue of HP, because to me it showed that Sarbanes-Oxley has really been very helpful. It was a very small, contained problem, didn't involve massive accounting fraud, didn't involve defective products. It involved invading the privacy of 11 people, and it was contained, and apologized for, and rectified pretty quickly.

So I think that part of the system, that hole in the dike, has been plugged. Which next ones are going to spring open? Not sure yet.

JEFFREY BROWN: But you're worried that some in corporate America want to -- they think that Sarbanes-Oxley goes too far? They'd like to roll that back.

NELL MINOW: Yes. There's been a lot of complaints about that. Business, in particular, has objected to the notorious Section 404 of Sarbanes-Oxley, which -- let me tell you -- all it says is this: Companies have to have internal controls, letting them know whether their systems work or not. Section 404 says, "Could you let us know if they work? Could you let us know if your internal controls are effective?"

And companies are complaining about that, saying it's too expensive. My response to that: Yes, complying with Section 404 is expensive. Not complying, well, that's what happened at Enron, and WorldCom, and Adelphia, and all the others. That's really expensive.

JEFFREY BROWN: What do you think about that, Professor Sonnenfeld, in terms of going too far with something like Sarbanes-Oxley and these aggressive judicial cases?

JEFFREY SONNENFELD: That's a very timely question. To the surprise of many today in Milwaukee, Treasury Secretary Henry Paulson actually came out asking that question himself -- have we gone too far? -- and specifically mentioned Sarbanes-Oxley.

Not to take away any credit from Senator Sarbanes and Congressman Oxley, but this would not have happened if it weren't for Hank Paulson's support. As the CEO of Goldman Sachs, he was the one lone, courageous voice in the American business community who, as an incumbent CEO, spoke out in favor of exactly these reforms.

And there are a lot of good reforms there that are having to do with rolling up the numbers fast, or whistleblower protection, the kinds of things Nell's company has a study out that actually takes a look at the back-dating that would have been prevented, the options manipulations, with the new rules in Sarbanes-Oxley that require faster reporting of certain things.

But Section 404 is a troublesome one. And it doesn't really -- as the law is written, it basically said audit committees have to attest to the adequacy of financial controls. The problem is in the rulemaking, and there's endless tests and procedures. And you just really know how much is enough. It's kind of a limitless ceiling. Some say it's a wonderful gift to the accounting community.

So there are issues out there that we need to work through, too much in the way of checklists. Your question to Nell was a great one, asking about a culture of fraud or corruption. And it's the character of the board. It's the culture, that it defies simple checklists as to who's the chairman or questions or whose excessive statements of who's conflicted on a board because somebody knew somebody back in college. I mean, it's starting to get a little crazy.

Inside candidates for CEO positions are disparaged because of a fear of cronyism. And we're essentially undermining elaborate human resource systems for fear it's going to look like it's not diligent if it's a product from within.

Some businesses now risk averse

Nell Minow
The Corporate Library
It is the job of the board of directors to make sure that the competition and other indicators that they give the CEO keep him or her focused in the right direction and taking the risks that need to be taken.

JEFFREY BROWN: Are you worried that the pendulum can swing too -- you're not worried that it's going too far yet, huh?

NELL MINOW: I always worry that the forest of good corporate governance gets lost in the trees of checklists and compliance. People are risk-averse. They look for safe harbors, but I don't think that's the fault of Sarbanes-Oxley. I think that's the fault of, you know, the character.

I think that I worry a little bit that CEOs look at sentences like these and they become risk-averse in the wrong way, that they...

JEFFREY BROWN: How is that?

NELL MINOW: ... that, instead of being not wanting to risk breaking the law, they don't want to take any risks at all. They want to stay at home and invest the entire company's assets in T-bills or something like that.

So I do worry about that, and I think it is the job of the board of directors to make sure that the competition and other indicators that they give the CEO keep him or her focused in the right direction and taking the risks that need to be taken. So I think that that is very important.

And I worry, too, that globally we're making ourselves less competitive, not by Sarbanes-Oxley, which I think the business community sometimes says, but by some of our other business practices, like excessive compensation.

JEFFREY BROWN: You're nodding your head. Go ahead.

JEFFREY SONNENFELD: Yes, and along with Nell, who's completely right, is Sarbanes-Oxley gets blamed for other pathologies in our system. And the excessive compensation is one; the very short-term focus is a problem.

I often will speak to the portfolios of hedge funds, private equity funds, where you have rooms full of CEOs that used to be so eager to be liberated, to go out and be set free as public companies. Now they sit in these ballrooms and they say, "Please don't send us out there. It's cold."

Part of it's the scrutiny of governance issues, but a lot of it has to do with the short-term focus in way they're being judged for longer term investments. They'd rather stay as private companies. And that is -- Nell's right -- is a huge challenge.

And I also happen to agree with her that there is a historic sweep here. And it always changes as to where our vulnerability is. Where the greatest uncertainties are, where we have great dislocations, opportunists sweep in. In the war years, we regularly see profiteers. We had a lot of price-fixing in the 1960s, now referred to as some of the financial scandals of the '70s. In the 1930s, we had rampant financial scandals.

What's so horrifying about this recent period is that these were not New England aristocrats abusing positions of power and prominence that they had in the 1930s. These were people who were almost without exception people who were part of the American dream. They were upwardly mobile folks that really turned the American dream into a nightmare. And as leaders, they set terrible code of moral conduct.

NELL MINOW: Well, the other thing that was a nightmare about it was that it wasn't just the CEOs, it wasn't just the boards. It was everybody. It was the securities analysts; it was the lawyers; it was the accountants, every single system that was set up to provide some kind of check and balance. I have to say the press was pretty bad, too. They were very credulous about these guys.

And so everything failed at the same time. It was a big perfect storm. And I think Sarbanes-Oxley does address a lot of those issues. There are still some that are left open.

The future of business

Jeffrey Sonnenfeld
Yale School of Management
We've seen boards become very responsive to their owners. They're doing a good job. And CEOs are very responsive to their owners who are trying much better transparency.

JEFFREY BROWN: Well, so just as we sum up here, to the extent that you both say that this is cyclical and you're suggesting it can happen again, Nell Minow, what do you want to see happen now?

NELL MINOW: What I want to see happen is the one group we haven't really talked about yet: the shareholders. I want to see them playing more of an oversight role. And there are a lot of initiatives now that I think will make it easier and more effective for them to do that.

JEFFREY BROWN: And, Jeffrey Sonnenfeld, what do you want to see now?

JEFFREY SONNENFELD: Well, I think we've seen boards become very responsive to their owners. They're doing a good job. And CEOs are very responsive to their owners who are trying much better transparency.

The people who have not been held accountable are often the advisers, many times the law firms. And that's the secret problem in places like HP: horrible legal advice. And they've never been held accountable. Many of these back-dating issues tie back to the same law firm right at the core of them.

JEFFREY BROWN: Do you see any move in that direction?

JEFFREY SONNENFELD: Not enough. It's very hard, since the lawyers write the laws and prosecute the bad guys, that not necessarily it's professional courtesy, but it's very hard to actually hold the legal community to the standards they need to be held to, to make sure that folks don't hide behind the skirts of misguided legal advice, of which there's plenty of it out there.

JEFFREY BROWN: All right, Jeffrey Sonnenfeld, Nell Minow, thanks very much.

NELL MINOW: Thank you.