Taking stock of Enron’s board

By Mark Babineck

Associated Press

HOUSTON — At best, they were bamboozled by executives who offered empty assurances and fuzzy math in place of lucid balance sheets. At worst, they rubber-stamped shady deals and then stood by idly as secretive partnerships helped bleed Enron Corp. to death.

Neither scenario can be particularly comforting for the 15 current and former independent directors of Enron who have served since the board waived the company’s ethics code to let a top executive work both sides of business deals with the company.

"When you’re on the board and someone comes to you and says he wants to waive a conflict-of-interest rule, here is why they pay you all that money," said Nell Minow of The Corporate Library, which monitors governance issues.

"They don’t pay you to smile and have your picture in the annual report."

Now the board members, who hail from four continents and represent nearly every region of the United States, face lawsuits and inquiries as others debate their culpability.

Washington, D.C., attorney Neil Eggleston, who represents the entire current board and has advised them not to speak publicly as individuals, said the group is better portrayed as victims than perpetrators.

"Most of the outside directors have full-time jobs and they’re expected to be outside directors, not managers of the company," Eggleston said. "They have to — and the law permits them to — make judgments based on advice from management, inside legal advisers, outside legal advisers and the outside accounting firm."

A voluminous internal report, headed by new director William Powers and released earlier this month, criticized the board for not thoroughly questioning problematic deals and not monitoring them after approval.

"The board of directors was denied important information that might have led it to take action (sooner), but the board also did not fully appreciate the significance of some of the specific information that came before it," read a section of the report written by Powers and professional corporate director Raymond Troubh, another board latecomer.

Herbert Winokur Jr., a longtime director and third member of the investigative committee, abstained from portions of the report addressing board conduct and testified before Congress earlier this month that he disagreed with some conclusions.

"With the benefit of hindsight, the report criticizes our decision (to form a partnership with a group headed by Enron chief financial officer Andrew Fastow), but our business decisions can only be evaluated based on the facts known to us at the time when we made it," Winokur told an investigative panel of the U.S. House Energy and Commerce Committee.

The Powers report concurs that the board was not given crucial information that almost certainly would have led to sorely needed scrutiny of various partnerships engineered by Fastow. The report also agreed that auditing firm Arthur Andersen LLP and law firm Vinson &Elkins failed to warn the board of impending bookkeeping hazards.

But the report didn’t spare the board, either. Some examples:

The board should have demanded more detail about Fastow’s compensation before agreeing to waive the code of ethics in June 1999, which allowed him to create the first LJM partnership and go on to make millions dealing with Enron.

Also, Powers determined the board "did not consider the need for safeguards that would protect Enron in transactions between Enron and LJM1," another partnership.

While the report said Fastow’s proposal for yet another partnership, LJM2, was worth considering on its face, the host of accounting controls enacted to protect Enron’s interests should have been a warning sign.

"A conflict of this significance … should not have been approved in the first place," Powers said.

Audit committee members spent 10 to 15 minutes a meeting discussing the complex LJM transactions, the report discovered, and there is no evidence directors probed the millions Fastow apparently was making from the deals until October, when the company was already dying.

Another red flag should have been seen in a set of transactions called the Raptors, initiated May 1, 2000.

Board discussion of them "suggested an absence of economic substance," the report said. It said the board should have ordered a special review by the audit committee, which in turn should have had tough questions for Arthur Andersen.

The report noted that Andersen, along with internal auditors, signed off on the Raptors and participated in other financing arrangements. The exposure and settling of the various transactions in late 2001 shaved Enron’s previously reported profits by $586 million and sped its descent into bankruptcy Dec. 2.

Unknown to most insiders and virtually all outsiders, Enron actually began to crumble last spring when the accounting schemes that set up the Raptors began unraveling.

"The Raptor problem was huge for the company in terms of its creditors," said Eggleston, the board’s attorney, who said that neither the partnerships’ lack of creditworthiness nor the $800 million worth of Enron stock used to prop up the Raptors last March was disclosed to the board.

Many directors suffered sizable losses when Enron’s stock crashed last year — New York oilman Robert A. Belfer, who with his brother-in-law were Enron’s largest stakeholders, reportedly lost around $1 billion in value alone. Corporate governance expert Charles Elson contends their own holdings should have made them that much more inquisitive.

"If they’re going to hide something from you it’s almost impossible to detect it. You’re relying on the good intentions of management. On the other hand, in this case there were very strong clues."

The more independent corporate boards are, the better they are at scrutinizing the companies they oversee. The kinds of things that compromise that independence are consulting contracts with the company, common bonds to charities and memberships on other boards doing big business with the company. Ten of Enron’s 15 most recent independent directors, excluding Powers and Troubh, had such conflicts.

Attorneys representing shareholders, destitute retirees and laid-off workers contend directors were the ultimate authority and should be held responsible for Enron’s collapse.

But neither Minow nor Elson, despite their criticisms of the board, believe Enron’s outside directors ultimately be held liable.

"The odds of any director liability is about zero," Minow said, noting a 1980s case where directors were forced to pay damages for negligence caused states to tighten director-liability laws.

Minow lamented that laws governing boards, which come at the state level and generally follow Delaware’s standard, are unlikely to change anytime soon. She hopes companies will take the initiative themselves.

"I guarantee you that every (corporate) lawyer in America is calling every client saying, ‘We need to talk about what your board is doing,’ " Minow said.