‘We are satisfied with nothing less than the very best in everything we do. The great fun here will be for all of us to discover just how good we can really be.’ Unfortunately for Enron and its many stakeholders, that turned out to be not very good at all, which means that its last annual report now makes for some sorry reading.
Great fun, indeed. Nearly every page is full of the sort of corporate puff that many companies still delight in dishing out to their shareholders – even though it means nothing and reassures no-one. A section on Enron’s core values of ‘communication, respect, integrity and excellence’ seems particularly crass. Of course, hindsight is great but any IRO busying themselves in the preparation of this year’s annual report should take time to flick through the Enron document for a few object lessons (www.enron.com/corp/investors/annuals/2000/index.html – assuming someone’s still paying the web site provider). Maybe it will lead other companies towards cutting the hype in next year’s reports.
Reevaluating the way you communicate your messages to your audiences is just one of the IR lessons from the Enron debacle. The backlash is only just beginning and the corporate governance implications are going to be hurting companies across the globe for many years to come. Harvey Pitt and his buddies at the SEC and FASB know that only strong actions are going to restore faith in the power of auditing and good governance.
The spirit of any rule revamps in the States will soon be incorporated in the major European and Asian markets. Institutional and retail investors are also going to be pickier about certain issues. Proxy statements and SEC filings will be pored over for clues, so executives should be doing their utmost to clean out any remaining dirt.
Good governance practice remains the key. Related party transactions are coming in for a lot more scrutiny and you don’t want to suggest to shareholders that your company occupies anything less than the moral high ground. Disclosure is crucial. What – exactly – are the risks and benefits to shareholders of such transactions?
If you can’t detail that sort of information then questions should be asked internally about the need for such deals in the first place – before analysts get their claws into you.
Institutions and analysts know they were remiss for failing to ask more questions of Enron about the various deals it struck with its own directors – deals that were revealed in last year’s proxy statement. Should more alarm bells have rung because Enron director John Urquhart was paid nearly $500,000 for consulting services to the company? You betcha. And what about the $517,000 for travel services paid to a company half-owned by Sharon Lay, sister of Enron chairman and CEO Ken Lay? Oops, failed to pick up the details on that one, too.
As Nell Minnow, governance guru and founder of the Corporate Library, succinctly notes, ‘Best practice means no consulting fees to any directors.’
It might also be an idea to question the use of the same firm to do your auditing and consulting. Arthur Andersen’s role in the affair is likely to be unraveled more over the next few months but one thing is clear: it doesn’t look good. The United Brotherhood of Carpenters has already tabled proposals calling on companies not to hire the same firm to do both jobs. More will follow. Accounting firms in all major markets are likely to take a huge hit but that’s their problem – not yours.
Finally, take a long hard look at your risk management practices and then upgrade them several times over. Of course, in its annual report, Enron claims to have done just that. Use the words of Kenneth Lay as a reminder: ‘Our talented people, global presence, financial strength and massive market knowledge have created our sustainable and unique businesses. We plan to leverage all of these competitive advantages to create significant value for our shareholders.’
