The Enron settlement

For completeness I should have noted, re my post on the WorldCom settlement, that 19 ex-Enron Corp. directors agreed to a $168 million settlement in the Enron investor lawsuit.  Like the WorldCom directors, they will pay out of their own pockets, in this case $13 million.

Both cases involved directors who didn’t do enough to spot the frauds.  The directors’ conduct, or lack thereof, is laid out in the Enron complaint, which I discuss in my Sarbox and Class Actions acticles. But the personal liability in the Enron settlement is based on the defendants’ stock profits.  As I reported, the settling WorldCom directors had no such profits, and indeed had significant losses, but were nevertheless required to pay 20% of their pre-tax net worth.

A problem with the private litigation system is, of course, the lack of complete consistency across different plaintiffs, with different parties and lawyers and in different courts.  One wonders what explains the differences in the settlements, and the extent to which they reflect the quality of the lawyers’ efforts.  In the Enron case, the plaintiffs’ lawyer is the vaunted Bill Lerach who, as I reported a couple of days ago, let a $750 million settlement against Andersen get away (forcing him now to go after smaller fish).

Finally, in fairness I should point out given my discussion of Judith Areen in connection with the WorldCom settlement that one of the settling defendants in Enron is Wendy Gramm, wife of Phil, and a former colleague of mine at George Mason.  I noted that Areen, an ethics expert and law dean, hardly should have been expected to spot sophisticated fraud.  Wendy Gramm, a member of the Enron audit committee, is a finance expert, former head of the Commodity Futures Trading Commission. 

But this doesn’t quell my skepticism of board reform as an answer to corporate fraud.  It appears that independence plus expertise is still not going to be enough. As I said last week, we need a more fundamental solution to corporate governance problems than tinkering with board reform, or whipping the directors who make mistakes.

Comments

[Justine]

If expertise and independance of board members is not enough, should we address the personal responsability of the management team and employees? What if the problem is the corporate culture?

We have Nortel in Canada. 2 members were experts on corporate governance.

Should the law be amended to include an overall company responsability directly to society

[Justine]

If expertise and independance of board members is not enough, should we address the personal responsability of the management team and employees? What if the problem is the corporate culture?

We have Nortel in Canada. 2 members were experts on corporate governance.

Should the law be amended to include an overall company responsability directly to society

[Henry Silk (Silk Enterprises, Inc.]

None at this time.