The Enron scandal – could it happen here?

Watkins (right) made it onto the front cover of Time magazine Keystone

Four years ago, America’s seventh-largest firm collapsed in an unprecedented accounting scandal – and became a byword for massive corporate fraud.

Sherron Watkins – the former Enron executive whose “whistle-blowing” internal memo helped precipitate the collapse – told swissinfo how her colleagues got away so long with criminal business practices.

Watkins, a keynote speaker at a business ethics conference organised by the Lucerne-based International Human Rights Forum, says many of the real lessons of the Enron scandal have not yet been learned.

And two of the issues she highlights – “astronomical” pay packages for senior executives and the growing tendency for top managers to take over all the main levers of power – have been very much in the news recently in Switzerland.

On Friday, Nestle CEO Peter Brabeck – who was also appointed board chairman this month despite considerable shareholder resistance – faces further opposition to his reappointment as a board member at leading bank Credit Suisse.

swissinfo: How can a company like Enron just implode overnight. What really happened?

Sherron Watkins: The people behind this took highly complex accounting rules and created structures that were so complicated that it took three hours just to try to explain them. If you still didn’t understand, you somehow thought this must be your own fault.

It’s very like the fable of the emperor’s new clothing. The cloth is beautiful, and changes to a thousand colours as you look at it – only you can’t see it if you’re stupid or not fit for office. And so, as various “ministers” checked the progress of Enron’s cloth, their own insecurities made them say they could see the cloth.

swissinfo: What would be your advice today to employees of a company who think that some of its practices are seriously questionable?

S.W.: First, try to get the support of other employees. Talk to them confidentially, see if you can stay anonymous and report the concern that way. If not, however, there is safety in numbers. When you are one lone person, you are easy to get rid of. Our CEO, Ken Lay, was able to dismiss my concerns as just one person’s opinion. I think that, if I had got more people to go with me, the outcome might have been different.

swissinfo: Do you think the lessons of Enron have been learned in the United States?

S.W.: Yes and no. The [new] Sarbanes-Oxley act has companies paying a lot more attention to accounting problems, and there are “whistle-blower” provisions and so on. But some of the largest problems are still there, in the sense of the imperial CEOs and their astronomical pay packages. [Legendary investor] Warren Buffet has said that CEO pay is the acid test of whether corporate reform has really happened in the US.

swissinfo: What lessons could Europeans learn?

S.W.: I think one of the strongest things the Europeans have going for them is that they typically still do have a strong chairman of the board position. Usually this is held by one of the outside directors, and it is viewed as a separate job. That is an enviable corporate governance procedure that the US lacks.

This is particularly important because, in the US, we have largely lost the active shareholder voice. Most individuals no longer own individual stocks – they do so through mutual funds etc. That means that we are effectively left with only the board system in oversight terms. However, as most CEOs in the US are also board chairman, you just don’t have adequate independent supervision. Management is supposed to be hired by the board but, in effect, it now picks the board.

swissinfo: Suppose I’m a top manager of a major company today. What could or should induce me to be honest?

S.W.: The ethical companies do win in the end. There may be hiccups where the abusers of the system appear to be winning, but in the end they usually don’t. The problem is: are you looking after the company’s interests, or your own? Because if it’s the latter, then it’s better to inflate short-term results as much as possible, create “legacy wealth” for yourself, and then retire. But if you’ve got the company’s best interests at heart, then you want to do things very differently.

swissinfo: You paint a gloomy picture. Do you think there are any factors working in favour of improved corporate transparency?

S.W.: I’m very optimistic about how the internet will be used in the future. With internet chat rooms, blogging and so on, companies in future will not be able to hide their poor practices and behaviour so easily. I think we are seeing the start of a wonderful new tool that will act as another deterrent. We seem to have lost the shareholder voice but maybe we have gained something to take its place.

swissinfo–interview: Chris Lewis

Key facts

Enron pioneered new financial trading techniques in areas such as power, communications – and the weather.
Using fraudulent accounting techniques, it acquired the status of America’s seventh largest company by revenue.
In 2001, it became the largest corporate failure in history, and is now a global symbol of institutionalised corporate fraud.

In brief

Watkins says some lessons of the Enron scandal have been learned – particularly regarding accounting oversight.

However, she says several more fundamental issues still need to be addressed.

She strongly criticises the tendency for both power and financial rewards to be concentrated in the hands of a few top executives.