The report commissioned by Enron Corp.’s board on the company’s stunning collapse castigates the company’s auditors and former managers, but its more benign tone toward the board itself is drawing criticism from outside observers.
While Enron’s board of directors had a clear duty to oversee Enron’s business operations and accounting practices, they say, the report goes to some lengths to portray board members as passive participants duped by the deceptions of Enron managers.
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“It might not have been a whitewash,” said Patrick McGurn, vice president of Institutional Shareholder Services, which advises institutional investors on corporate governance issues. “But it goes pretty soft on the board.”
Late last year Enron’s board commissioned the dean of the University of Texas law school, William Powers, to lead a committee to investigate Enron’s troubled partnership deals. Powers is on Enron’s board, as are the other two people on the committee, Herbert Winokur and Raymond Troubh. The panel’s report was released over the weekend, and its contents are now being aggressively questioned.
Critics say the report comes close to apologizing for the Enron directors’ failures, pointing to various statements in it that seek to direct blame toward Enron’s top executives and Chicago-based Andersen. “The board appears,” the report says in one such reference, “to have reasonably relied upon the professional judgment of Andersen [Enron’s auditor] concerning Enron’s financial statements.”
The report does contain some comments that are critical of the Enron board. Of the accounting procedures that were used to hide huge Enron debts and losses in a group of outside partnerships, for example, Powers’ report says the problems “could have and should have been prevented or detected at an earlier time had the board been more aggressive and vigilant.”
The report’s goal, McGurn said, may have been to portray the board as bumbling, but not criminally involved in the dealings that brought Enron down. “The best-case scenario for the board was to paint themselves as lazy and maybe a little bit stupid, and that’s how they come out in the report,” McGurn said. “From their standpoint, that is good.”
A spokesman for Enron and its board of directors denied that there were any ulterior motives in the board hiring one of its own to investigate itself.
“I think one would be stretched to say there was any compromise in the Powers report,” said Vance Meyer. “The board’s objective in hiring Powers was finding someone who was highly qualified for the task. The board felt that he was.”
For virtually every transgression the report says the board committed, it also suggests mitigating factors. In some cases, the report says, the board could not comprehend the transactions that were proposed.
In other cases, it says, the board was kept in the dark and possibly lied to about the details of the partnerships. “No one in management stepped forward to address the issues as they arose to bring the apparent problems to the board’s attention,” the report says.
Powers, the report’s author, pressed the point in testimony Monday before a House subcommittee, repeatedly saying that the Enron board did not approve questionable transactions by Enron managers. “On particular facts,” Powers testified, “the board was misled.”
Nell Minow, a shareholder activist in corporate governance issues, said the board’s decision, in effect, to investigate itself rather than turn over the inquiry to an independent third-party undermines the report’s conclusions. “I think it is best to bring in someone from the outside, if only to establish your credibility,” Minow said.
Moreover, the report’s main author has deep ties to Enron. Enron has given $250,000 to Powers’ law school and $3 million to the university since 1998. Enron’s law firm, Vinson & Elkins, endowed a chair at the law school.
Other Enron directors, meanwhile, have had business dealings with the company. In the early 1990s, director Roger Belfer established a company, Belco Oil & Gas. Enron was one of his company’s customers.
Since 1996, Enron’s proxy statement has noted that “Belco Oil & Gas Corp. has entered into natural gas and crude oil commodity swap agreements and option agreements with Enron Capital & Trade Resources Corp.” In 2000, Enron received $33 million related to those agreements.
Other directors had looser but still profitable dealings with once-mighty Enron. John Urquhart, a former Enron director, has since 1991 been a consultant to Enron and, more recently, to Chairman Kenneth Lay. In 2000, Enron paid Urquhart $493,914 for consulting.
That’s on top of Urquhart’s $50,000 annual director’s fee and the $10,000 he received for serving on a committee.
Urquhart also served as a director of Enron Renewable Energy Corp. until last year. For that work, Enron awarded him options to buy 115,000 shares of stock. When Enron Renewable merged with another Enron subsidiary, Enron allowed Urquhart to cash out his options for $2.4 million.
Urquhart was also a member of Enron’s finance committee.
Winokur, a member of the committee that produced the report, has been a director since 1985. Winokur is also affiliated with the National Tank Co., an oil industry supplier, which in 2000 received $370,294 in sales from Enron, according to Enron’s most recent proxy.
Lord John Wakeham, a former British energy minister, was both an Enron director and a consultant to the company. Wakeham received $70,000 last year in consulting fees, as well as another $70,000 as a board member.
Meyer, the Enron spokesman, said there was nothing secret about the directors’ financial relationships with Enron. “I would only point out that all of these business dealings have been properly disclosed in our proxy statement,” Meyer said.
Among the 15 outside directors who served on Enron’s board last year, Wendy Gramm has received the most attention. The wife of Sen. Phil Gramm (R-Tex.), Wendy Gramm once chaired the Commodity Futures Trading Commission.
In her final days there in 1993, she lifted restrictions on energy trading by companies like Enron. She was appointed to Enron’s board a few weeks after leaving the commission.
Gramm has said she sold most of her Enron holdings in the late 1990s, around the time the Senate introduced a bill to make her 1993 regulatory ruling the law. Gramm received net proceeds of $207,460 from the sale of her Enron stock options. The total face value of those shares was $469,982, according to Securities and Exchange Commission records. The bill passed with her husband as a sponsor. (This paragraph as published has been corrected in this text.)
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Enron’s board of directors
– Robert Belfer, chief executive, Belfer Management.
– Norman Blake Jr., chairman, president and CEO of Comdisco; former CEO and secretary general, U.S. Olympic Committee.
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– Ronnie Chan, chairman, Hang Lung Group.
– John Duncan, former chairman of the executive committee of Gulf & Western Industries.
– Wendy Gramm, director of the Regulatory Studies Program of the Mercatus Center at George Mason University in Virginia; former chairman of the U.S. Commodity Futures Trading Commission; wife of U.S. Sen. Phil Gramm (R-Texas).
– Robert Jaedicke, professor emeritus of accounting and former dean, Graduate School of Business, Stanford University.
– Kenneth Lay, former Enron chairman and CEO; resigned from board Monday.
– Charles Lemaistre, president emeritus, M.D. Anderson Cancer Center, University of Texas.
– John Mendelsohn, president, M.D. Anderson Cancer Center.
– Paulo Ferraz Pereira, executive vice president of Group Bozano.
– William Powers Jr., dean of the University of Texas School of Law.
– Frank Savage, CEO, Savage Holdings.
– Raymond Troubh, financial consultant.
– John Wakeham, former United Kingdom secretary of state for energy.
– Herbert Winokur Jr., chairman and CEO of Capricorn Holdings and former senior executive vice president, Penn Central Corp.
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