Lessons from Enron: a Symposium on Corporate Governance - Alfred P. Carlton, Jr., R. William Ide Iii, the Honorable Benjamin F. Tennille, and Solomon B. Watson Iv

• Citation: Vol. 54 No. 2
• Publication year: 2003

Lessons from Enron: A Symposium on Corporate Governance October 17, 2002 Morning Session

DEAN SABBATH: I am Mike Sabbath, the Interim Dean of the Law School, and I am very pleased to welcome you to Mercer and to our Law Review Symposium. I can't imagine a more timely topic than the one we will be talking about today and a more distinguished group of panelists to lead us in our discussion. I anticipate a lively and informative discussion.

I have the pleasure of introducing Pat Longan. I'm finding as Dean that if you surround yourself with good people and they do all the work, you often get the credit, and it's really undeserved. Pat is largely responsible for putting this Symposium together. He's our William Augustus Bootle Chair in Ethics and Professionalism. He's also the director for the Mercer Center for Legal Ethics and Professionalism. Pat is an excellent teacher and has made numerous presentations throughout the country. He graduated from the University of Chicago Law School and clerked for a federal judge. I could say all kinds of wonderful things about him, but I want to mention one unknown little award that he's gotten. In elementary school, Pat won the smile contest at the Victor Hexter Elementary School back in 1964. When he gets up here in a moment and you see his warm smile, you'll see why he got the award. Some things haven't changed. So I'm going to turn it over to Pat. He'll introduce the Symposium participants for today, and I look forward to a wonderful program. Pat.

PROFESSOR LONGAN: Thank you, Mike. Thank all of you for coming. I think we're going to have a very interesting and productive day. It's hard to believe it was just a year ago yesterday when the

Enron Corporation announced that it was taking a loss in excess of $600 million, to the surprise and dismay of its employees, its investors, and a number of other people.

In the year since then, there have been a number of other distressing events. We've seen what happened with Adelphia and WorldCom. We've seen Arthur Andersen indicted, tried, convicted, and, yesterday, sentenced for obstruction of justice. It has been a difficult year for corporate America and for people who work in corporate America.

What we're here to do today is to talk about how all that happened and to talk about what might be done to keep it from happening again. Since the failure of Enron, there have been a number of attempts to find ways to prevent similar things from happening. The ABA has had a Task Force on Corporate Responsibility whose work is still ongoing. You have their preliminary report in front of you,¹ and you have many of the members of that Task Force here in the front of the room. Congress has gotten involved. The SEC has gotten involved. We're going to be talking about all of those efforts with the intention, we hope, of learning some ways in which we can avoid repeating the kinds of events we've seen in the last year.

Before we get to that, I have just a few thank you's that absolutely have to be said. Thank you to the members of the Law Review, especially Sheila Baran and Chad Franks, for everything they did to make this Symposium possible. Thanks especially to Yonna Shaw for the million and one things she did for this to happen. Thank you to all of our panelists, many of whom have traveled a long way to be with us today. We deeply appreciate your willingness to do that and to share your thoughts and your insights with us. Thank you to my good friend, Walt Austin, and the Business School for their participation and their assistance in putting our Symposium together. This is a cooperative enterprise of the Law School and of the Business School, and we're happy that we were able to do that.

I must say one final special word of thanks to Bill Ide. Bill, as many of you know, is a former president of the American Bar Association, a very distinguished lawyer in Atlanta, and a member of the ABA Task Force. When I contacted Bill about this Symposium and started talking to him about it, he embraced it with enthusiasm and with a vision for what good it might do. What you're going to see today is due in large measure to what Bill has done to put it together. Bill, I deeply appreciate what you've done, and on behalf of the Law School and the

Law Review, thank you. At this point, I'm going to turn it over to Bill, and we'll get underway.

MR. IDE: Thanks, Pat. I have a cartoon here that shows a general counsel talking to his CEO, and the CEO says, "Don't you realize that by bringing these matters to my attention you're involving me?" So it's quite a time.

To you law students, I remember when I got out of law school at the University of Virginia, I went to a large corporate firm and I ordered The Wall Street Journal because that was what you were supposed to do to look like you were important. I didn't understand most of the things that were going on in The Wall Street Journal. But this is Wall Street Journal stuff we're going to be talking about today, as opposed to your usual law school experience, where you're looking back in history. We're going to have a discussion about policy and laws that are being shaped right now in our society. We hope to demonstrate to you how policy gets set and how regulations are influenced as this country deals, as it often does, in reacting to a jolt to its society.

The way the law deals with perceived gaps allowing harm is just like we're doing right here. You pull people together that have experience in the area and start talking through the issues with the goal of bringing forth thinking that will influence the various decision makers in the justice system. It doesn't do enough to just go to Congress or go to the SEC. You need to influence the culture of the justice system, and ultimately, you must shape the culture of corporate America because that's where these ultimate decisions are going to be made.

So here we go. I'm going to set the stage for our first session. You have distinguished panelists. Their resumes are in your materials. Three are former general counsels. ABA President A.P. Carlton was a bank general counsel. Sol Watson is general counsel to the New York Times and was a general counsel of the Monsanto Corporation. Judge Tennille sits on the North Carolina Business Court and is a thought leader in corporate law.

Let me give a predicate to our discussions. It was on October 16th, 2001 when one of the most acclaimed and admired corporations in America, Enron, reported a shocking first quarter loss of $618 million, and within a week the CFO, Andrew Fastow, was fired. On December 2nd, Enron filed for bankruptcy in the wake of revelations of over-stated earnings and off balance sheet frauds. Employees not only lost their jobs, but also their savings, which were in a retirement fund invested in Enron stock.

The damage to the shareholders, innocent employees, vendors, and communities from this fraud-caused failure has been horrific. It's been devastating to so many lives, not only to the Enron employees, but also people who dealt with Enron.

And then there was Arthur Andersen—the venerable institution in accounting that we always look to as the leader. It was convicted for obstruction of justice in conjunction with the destruction of documents relating to Enron, filed for bankruptcy, and in less than one year, is out of business.

Public shock was followed by anger and calls for action. By the Spring of 2002, over thirty Enron reform bills were pending in Congress. The New York Stock Exchange and NASDAQ had task forces that were proposing reforms, and the SEC gave notice of tighter disclosure requirements. Meanwhile, the Bush Administration went on record that they would hang'em high and be tough in enforcing the laws.

That was the environment at that time, and it became more charged when executives at Adelphia, Tyco, and other companies who had egregiously usurped company assets for personal gains were revealed to the public. Companies were announcing restatements, and as of today, one year later, the stock market lost $7 trillion in value since [the] Enron [scandal] started.

Despite all of that shock to the system, however, by early summer it looked as though the post-Enron reforms were going to be somewhat limited: self-regulatory reforms by the New York Stock Exchange and NASDAQ; some SEC tightening of disclosure time lines; and limited Congressional action in the regulation ofaccountants and in the ERISA area. And then came WorldCom. On June 25, 2002, WorldCom announced that it improperly accounted for over $3.8 billion in expenses over the previous five quarters, resulting in the largest earning restatement in business history. Within a month, WorldCom filed for bankruptcy.

WorldCom was the last straw for the public, and in Congress, the dikes ofcontainment gave way immediately. Corporate America and the accounting industry had successfully bottled up "reform" legislation. There were sound reasons why some of the legislation shouldn't have been passed: deference to state laws and deference to SEC administrative approaches. But with public cries for action, the over thirty pending bills were very quickly amalgamated into the passage of the Sarbanes-Oxley bill.² Congress's rush to claim solutions is an example of policy giving way to politics. The resultant legislation is disjunctive, overlapping, without regard to federalism, and ignores distinctions between policy and administration. Nevertheless, Congress claimed victory and moved on. Meanwhile we lawyers have to make sense ofthe result, and we will.

Since the passage of the Sarbanes legislation, the reform momentum continues. NASDAQ, which routinely is said to be the last to come along in the governance area, has further tightened its governance proposals, the SEC is expected to issue its determination on the NASDAQ and New York Stock Exchange proposals by the end of2002 or early 2003, and the Administration is pursuing its pledge to punish the corporate...