Lessons from Enron: a Symposium on Corporate Governance - R. William Ide Iii, Michael Rosenzweig, the Honorable Benjamin F. Tennille, Solomon B. Watson Iv, and Susan S. Jones

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

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

MR. IDE: Now we are going to get into more of the details on corporate governance post-Enron. Michael Rosenzweig will be our moderator. Michael, at age twenty-seven, joined the Michigan law faculty and was a professor there until age thirty-five, and then he saw the light and came into the private practice. The life-altering event for Michael was when, as an academic, a practitioner showed him a wonderful dynamic that was working so well in practice. Michael said, "That is fascinating. I wonder if it will work in theory?" That's when he realized it was time to switch over. So we're going to have a free form discussion of corporate governance. Michael is a partner in McKenna, Long, and Aldridge, a multi-city law firm in Atlanta.

MR. ROSENZWEIG: Thanks, Bill. I'm distressed that in telling that story you felt it necessary to reveal that I'm older than thirty-five now.

JUDGE TENNILLE: You've been in private practice four years, right?

MR. ROSENZWEIG: One of the great things about being on a law school campus is the vitality and the youth that one is privileged to witness, and one of the really depressing things about being on a law school campus is the vitality and youth with which you're confronted. It's very sobering.

MS. JONES: While you're up there, could you please explain to the audience who Freddie Prinze is?

MR. ROSENZWEIG: Freddie Prinze was the father, right? No, that was Freddie Prinze, Jr. You don't know who Freddie Prinze is if you know who Freddie Prinze, Jr. is. Freddie Prinz was a comedian, who, sadly, committed suicide.

MS. JONES: He had the "it's not my job defense."

MR. ROSENZWEIG: Oh, so that's the relevant part, "it's not my job?"

MS. JONES: Yes.

MR. ROSENZWEIG: I guess I've done a great job so far. I want to thank Bill for inviting me to be on this panel, and I wanted to thank my colleagues on the panel, who I think have provided a very interesting, and very stimulating, and high level discussion thus far.

The title of this segment of the program is "Proposed Corporate Governance Reforms," and I suppose the implicit suggestion is that since it's got a different title from the first two segments of the program, it must be different. And in some respects, to be sure, I think the discussion will be a little bit different. I think, among other things, we'll try to drill down at a greater level of detail into some of the corporate governance reforms that form the current debate and form the current landscape. But in a very real sense, I also think that this discussion is very much a continuation of the conversation that we started this morning. In particular, I do hope that we'll come back to some of the themes that we began to discuss this morning because I think those are the themes that are really pervasive in this arena, and I think they're the themes that form the debate and will continue to do so for some time. So while I do think we'll talk at some level of detail about specific governance reforms, I'm also hopeful that we'll be able to continue to talk about some of the broad issues that we talked about in such a stimulating fashion this morning.

You've heard a number of times, I think, already, and if you haven't heard it before now, I'm sure you've read this: that the Sarbanes-Oxley Act¹ represents, in many respects, the most sweeping federal regulation of public corporations since the federal securities laws were enacted some seventy years ago. And many would argue that in many respects Sarbanes-Oxley is an even more sweeping set of reforms than the federal securities laws.

Both before Sarbanes-Oxley, and certainly since the adoption of that law, we have seen various proposals in the corporate governance arena from the so-called SROs, the self-regulatory organizations. The New York Stock Exchange had proposed rules, NASDAQ had proposed rules, the SEC itself had proposed corporate governance reforms, and of course, more reforms from the SEC are expected under the legislation, both because the SEC has been given authority, and in certain cases, as you know, the SEC has been mandated to adopt rules under Sarbanes-Oxley.

I think a very interesting and legitimate question that we should ask ourselves about all of this is: Is there a common thread that we can identify with respect to all of these reforms? If we look at Sarbanes-Oxley, proposals from the SEC before and after Sarbanes-Oxley, proposals out of the New York Stock Exchange, [and] out of NASDAQ, is there a common thread? I would argue that there is very much a common thread, and I think the common thread is that governance matters. I think if you look at all of these reforms, the message, loud and clear and repeatedly, is that governance really does matter. What I mean by that is that the implicit, indeed, perhaps even the explicit assumption, that I think one can identify in all of these reforms is that good corporate governance tends to produce better, more socially desirable corporate decisions, and conversely, bad governance produces, or at least facilitates, bad corporate decisions.

Now, what do we mean when we say that? What do we mean when we talk about "good" and "bad" in this context, when we're talking about corporate decisions? Well, I suppose in a certain sense good corporate governance presumably causes corporate decisions that recognize and promote the fiduciary duties of corporate actors, duties that require those actors to subordinate their own interests to those to whom their fiduciary duties run. And I want to say this again because I think this in many ways is the over-arching theme that we can identify in all of these reforms, and certainly in Sarbanes-Oxley, that in a certain sense what we're trying to do, what Congress presumably was trying to do, and what the SEC and, to a certain extent, the New York Stock Exchange and NASDAQ are trying to do, is adopt reforms, adopt rules that promote the fiduciary duties of corporate actors that facilitate subordination of the interests of those actors, their own self-interests, to the interests of those to whom their fiduciary duties run.

In this sense I would argue that Sarbanes-Oxley is, among other things, an attempt really to codify, to a certain extent, standards of good governance; that is, an effort to adopt specific requirements, specific, concrete requirements that give detailed content to what would otherwise necessarily be, and is as a matter of state law, a broad concept that we call "fiduciary responsibility." There was a speech recently given by SEC Commissioner Cynthia Glassman, and I think she said this rather well. What Commissioner Glassman says that Sarbanes-Oxley and the SEC's rules are aimed at, and I'm quoting here, is "insuring that those who act on behalf of a company give life to the corporate con-science."² Now, that's very interesting when you think about it: the notion that we should have federal legislation, the central purpose of which, in the view of at least one SEC commissioner, is to give life to the corporate conscience.

I think the overriding question here, apart from those very interesting federalism issues that we talked about this morning and to which I hope we'll return in this conversation, is whether or not this is all really true: whether or not corporate governance will really involve a paradigm shift with respect to the responsibilities of corporate directors. We know that we've heard lots of talk about that. We know that we have heard lots of good intentions about that, but the real question is—are we witnesses to such a paradigm shift? Will corporate directors in this CEO-centric world in which we find ourselves really begin to act in demonstrably different ways in the discharge of their responsibilities, and will that, in turn, have the effect that's intended? Will that, in turn, in the final analysis, lead to a strengthening and augmenting of the duties of those fiduciaries and the way in which they perform?

Let me begin, before I turn to the panel with a series of questions, by reviewing briefly the basic landscape of the recent reforms. I know that we've referred to a number of these throughout the conversation this morning, but I want to begin by making sure that everybody in the room is on the same page, simply by reviewing some of the basic reforms that constitute this landscape, and then I'll raise some questions, and we can have some conversation with the panel.

A number of people observed that you can make a statement, and I think it's true, that in a general sense most of these reforms are aimed at independence. I think that's true. I think, however, that it's worth looking at some of the details. You have in your programs an excerpt from the preliminary report of the ABA Task Force on Corporate Responsibility.³ Exhibit A, which appears on page forty-four of your programs, is a good source, not the only source, but a good source for beginning to understand the landscape of proposed governance reforms. I want to look at that very briefly and literally just read some of that so that we have that in front of us as part of the basis for our discussion. So what are the recommended standards? These are all corporate governance recommendations.

Number one, a board of directors should include a substantial majority of independent directors. Number two, a corporate governance committee composed entirely of independent directors should be responsible for identifying and contacting potential independent directors. Three, the audit committee, about which there is a lot of interest and attention, should consist entirely of independent directors and should have authority to recommend or take action with respect to engaging and removing the outside auditor, engaging independent accounting and legal advisors when deemed necessary or appropriate, and establishing policies relating to non-audit services by the outside auditor. Four, the...