Lessons From Enron on Corporate Governance

The surrealistic rise and fall of Enron, a firm “Fortune” magazine ranked as fifth largest company in the world in terms of revenues, has provoked a myriad of governmental investigations into the company’s shocking lapses in ethical behavior.

For those in the corporate world, missing in the debate over Enron is what lessons we can learn about corporate governance in the critical realm of environment, health, and safety — the place where corporations are often under pressure to keep liabilities off the balance sheet. Ironically enough, truly independent external audits of a company’s environmental liabilities present some of the best opportunities to add value to not only shareholders, but to the general public alike.

Some 25 top corporate managers from firms deeply involved in EH&S matters — the likes of DuPont, Intel, and Southern California Edison — recently spoke about the challenges of trying to foster progress from within the walls of corporate America. All those in attendance at the Phoenix event agreed that the shadow of Enron was only making their jobs more challenging.

“Remember, a board of directors works for the shareholders, not the CEO of a corporation. In the Enron example, we clearly see a board not doing its job,” pointed out Ken Dickerson, former senior vice president for ARCO. Dickerson believes one of the greatest tragedies linked to the fall of Enron is the loss of confidence by the general public and investors in corporate boards charged with protecting the interests of shareholders and employees. “Self-dealing by corporate leaders cannot be tolerated by those ultimately responsible for the long-term interests of any corporation, and a way must be found to personally punish executive and corporate boards that abuse or ignore their fiduciary obligations,” added Dickerson.

If not disclosed and dealt with in an open and honest way, environmental liabilities can also hurt stockholders and employees. Frank Boren, who sat on the board of ARCO and worked closely with Dickerson, offered the following reflection: “I’m an environmentalist and I have to say when we shared with our full board information generated by our EH&S committee, one could sense the harmony inherent in our company. It was like a symphony, you could just feel it work. Those involved in environmental issues need to be able to bare their souls before a good board of directors.”

Under today’s accounting standards, a firm could have 50 contaminated sites, each with an estimated 49% chance of clean-up and contamination risk and, theoretically, none of this very significant liability would have to be reported. That is because current accounting practice dictates no reporting is required unless there is a greater than 50% chance that the financial exposure will be translated into real profit losses. One way for environmentally responsible companies to set themselves apart may be to have external EH&S experts — not financial auditors of the likes of Arthur Anderson — review the firm’s activities.

Steve Percy, retired chairman and CEO of British Petroleum America, Inc., believes a company’s chief environmental officer should be CEO. “When I was at BP, I firmly believed that we needed to go beyond compliance in order to secure a competitive advantage. Respecting the environment, public health, and worker safety all add shareholder value,” said Percy. Putting environmental values at the top can not only reduce corporate liabilities but can boost the bottom line.

Public expectations of corporations have dramatically increased since the fall of Enron. The 25 corporate leaders that met in Arizona were challenged to return to their firms with a new mandate: come clean on EH&S exposures. One benefit of the Enron debacle is that it has served as a wake-up call for responsible corporations to come clean on all aspects of business — including environmental liabilities.

The sooner a firm comes to grips with its EH&S responsibilities, the sooner it can show its competitors, and the general public, who really sits at the top of the pyramid of environmental excellence.

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Peter Asmus is author of Reaping The Wind, and Reinventing Electric Utilities, both published by Island Press. Bruce Piasecki is founder and president of the AHC Group, Inc. of Saratoga Springs, New York. He co-authored In Search of Environmental Excellence with Asmus and is chief editor of Corporate Strategy Today, a new executive briefing on environmental matters for leading corporations around the world.