Setting a new route for corporate governance.

• Author: Marshall, Jeffrey
• Position: Cover Story

Corporate governance has been shaken to the roots by revelations following the collapse of Enron. While a host of issues is involved, auditor independence and audit committee performance have drawn particular attention.

These days, Einstein's famous theorem, E=[MC.sup.(2)], could be rewritten with a more current formulation: Enron = management culpability squared.

Whatever becomes of the corporate assets of Enron Corp. and its fallen executives, the company's collapse will be forever remembered for its horrific object lesson on ethics and corporate governance. In its wake, critics of corporate policy-making have gotten a new soapbox, a revered accounting firm has been rudely dismantled and corporate icons like IBM Corp. and General Electric Co. have had their accounting practices put under an unprecedented public microscope.

The tangled threads of the Enron story, which include auditor independence, corporate ethics and accounting obfuscation, are continuing to play out. After voicing its collective outrage, Congress is weighing in with reform legislation -- two dozen bills of various kinds have been introduced, and at least one has passed the House - and the Securities and Exchange Commission and the major stock exchanges are being compelled to offer reforms of their own. The SEC has proposed rules calling on companies to go beyond boilerplate descriptions of their accounting to explain their financial condition in plain English.

Where all of this will end, no one knows. But it seems clear that, at least for the near term, there will be heightened sensitivity to corporate governance issues, especially as they touch on internal, and especially external, auditors. Shareholder activists and other critics of unresponsive corporate management have found traction with a public startled by the revelations of the accounting shenanigans at Enron and the fate of thousands of its employees whose life savings have been all but vaporized.

"Enron has been like a lightning bolt, shooting through corporate America," says Charles King, managing director of Korn/Ferry International's Global Board Services Practice.

It's changed the whole world of corporate governance. It's caused directors to examine their roles and responsibilities and dedicate more time and energy to their fiduciary responsibilities.

Few companies will experience the Icarus-like fall of Enron. Yet the recent travails of IBM, GE and Xerox Corp. -- the latter already reeling from earlier accounting charges -- argue that no one is safe from a market scalding and a bruising, if temporary, fall in stock price. Public companies, especially, are being forced to do some real soul-searching, and are bending over backwards to show that they are improving disclosure and revisiting independence and other key governance policies.

"It's evident in press releases describing enhanced disclosure and statements better outlining accounting practices that corporate America is beginning to respond," says Elizabeth Saunders, chairman of Ashton Partners, a Chicago financial communications consultancy. "By the time the SEC reforms and other regulatory proposals are debated and voted upon, market efficiencies may already have begun to solve the problem."

That may well be. Professional organizations like FBI have pushed for revisiting corporate ethics, arguing that management sets the tone for corporate governance -- and that top officers, like CFOs, should sign a code of ethics committing themselves to appropriate conduct (see page 7). Others have looked to root causes, arguing that the incestuous relationship between Arthur Andersen and Enron was a key element in the latter's downfall -- and that auditors must have more distance from their clients.

Companies are facing a newly energized shareholder community -- especially big pension funds, foundations and social activists, who often had trouble getting themselves heard in the go-go 1990s. "Enron has raised concerns of corporate governance to a level that is almost unimaginable," says Robert A.G. Monks, a prominent shareholder activist and founder of Institutional Shareholders Services in the 1980s and later Lens Inc., an investment fund. Monks also helped found the Corporate Library, a research organization dedicated to corporate governance.

"There have been periods before where we had significant movement toward reform, and concern for governance and social values," Monks adds. "Some came in the late '70s. The real...