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Raymond S. Troubh was named non-executive chairman of Enron 11 years ago—just five days before the company filed for bankruptcy. He performed the role until 2004, when the cleanup from the implosion of what had once been the seventh-largest company in the world was done.
Illustration by J. T. Morrow
A series of portentous events followed Enron’s filing. Chairman Ken Lay died, apparently of heart disease, in 2006. Other top executives, including CEO Jeff Skilling, CFO Andrew Fastow and Chief Accounting Officer Richard A. Causey, were sentenced to federal prison for criminal fraud. The Big Five accounting firms became The Big Four when Andersen Worldwide—the outside accounting firm for Enron, WorldCom, Tyco and other large corporations caught up in a wave of scandal— also went out of business.
While the investigations that ultimately would lead to the criminal charges against and convictions of Enron executives were being conducted, the board appointed a special three-person investigative committee to review related-party transactions between Enron and certain members of management.
On Feb. 1, 2002, the trio—Troubh, along with Enron legacy director and finance committee chair, Herbert (Pug) Winokur, and University of Texas Law professor William Powers Jr., then newly elected to the Enron board—delivered the Powers report. (Winokur abstained from those portions of the report that described the board and its committees.) The report’s analysis of the roles of management, the board and its accountant and lawyers concluded that Enron’s board of directors “failed in its oversight” of related-party transactions. Without the benefit of interviews with Enron management—the committee had no subpoena power—the report also found that Andersen “did not fulfill its professional responsibilities” and the law firm “Vinson & Elkins should have brought a more objective and critical voice.”
On the 10th anniversary of publication of the Powers report, NACD Directorship set out to assess just how the boardroom dynamic has changed for directors and officers. In interviews with key players and veteran board directors of that era, there is consensus that subsequent regulatory changes aimed at improving financial reporting and making corporate officers and their advisors accountable for the truth in numbers accelerated two long-developing trends: the influence in the boardroom of institutional shareholders and the empowerment of the independent director.
The SOX Effect
Even before 2002, there had been much talk of both forces, as shown in the mid-1980s founding of the Council of Institutional Investors and the mid-1970s founding of the National Association of Corporate Directors. But both trends exploded with the passage of the Sarbanes-Oxley Act of 2002 (SOX), focused on fixing companies’ financial reporting and internal controls.
SOX set new standards for audit committees, requiring, for example, that companies disclose whether at least one audit committee member is a “financial expert” with previous experience. SOX also moved oversight of the accounting firm to the audit committee, putting it in charge of hiring, firing and setting audit fees. In so doing, say veterans of the era, it also created distance— for better or worse—between the board and management. And it intensified a pattern of cause and effect that has become all too familiar since the Great Depression: Despite effective board operations in the vast majority of cases, a crisis happens, investors file resolutions or sue, legislators pass laws, regulators pass rules, boards implement the rules and a new crisis erupts that looks nothing like the last and the cycle repeats. Today, it’s the Dodd-Frank Wall Street Reform and Consumer Protection Act and myriad regulations being rolled out by the Securities and Exchange Commission, from its new whistleblower bounty program to conflict minerals and mine safety disclosures.
“I think it’s fair to say that after SOX, audit committee oversight has become more focused and intense,” says Mary Pat McCarthy, a Mutual of Omaha audit committee member who until her retirement earlier this year was a partner at KPMG, where she headed the Audit Committee Institute.
Some critics of SOX charge it was expensive to implement and that some of the elements legislated were already in place on the Enron board and didn’t prove to be effective deterrents. For example, the Enron board met the independence standards required by the New York Stock Exchange well in advance of SOX and had conducted the internal controls assessments that Section 404 of SOX mandated for all public companies. Regulation oftentimes feels like punishment—the whole class being reprimanded for the misdeeds of a few.
Even so, the greatest unintended consequence of all these new rules may be to skew what actually happens in the boardroom. Rather than devote time to consider new strategies or risks, there is a danger for some boards, particularly those that may be resource constrained, to adopt a check-the-box mentality. “There is a risk,” says NACD President and CEO Ken Daly, “and I’m not saying it’s happening, but it could, that a director becomes more involved in the political or compliance aspects of the job and is not looking at creating a sustained strategy for profitability.”