February 1 should be an important date on the governance calendar—the tenth anniversary of the influential “Powers Report”—the report of the internal investigative committee of the Enron board. The Powers Report is of pivotal significance in the development of corporate responsibility principles. It was an early example of the thoughtful and comprehensive board investigative report. It served to assign specific responsibility for the executive and governance failures that caused Enron’s demise. And it served as the catalyst for a series of highly important subsequent legislative, regulatory and public policy developments that are the framework for today’s corporate responsibility principles. For these and other reasons, it is vitally important that boards pause to reflect on the governance legacy of the Powers Report.
Michael W. Peregrine
These days, it is “standard operating procedure” for the board to evaluate looming controversies and crises through the use of the special investigative committee. And such procedure owes much to the structure, process (and courage) applied by the Powers Committee. Working under enormous economic, social and political pressures, the committee moved quickly but thoroughly through enormously complicated facts to deliver a comprehensive analysis less than two months following Enron’s filing for bankruptcy. The format of the Report, the independence and qualifications of the committee members, the style in which it pursued the inquiry, and the presentation of its conclusions served to “set the bar” for future efforts of this type.
And the Report pulled no punches in its analysis. To be certain, it assigned appropriate blame to the “smartest guys in the room”—the Skillings, Fastows and other recognizable executives. But it didn’t stop there, reserving some its harshest criticism for the board itself. Board members were “called out” for severe fiduciary lapses; e.g., inadequate and poorly implemented internal controls; failure to exercise sufficient diligence over corporate operations; failure to adequately respond to “red flags”; cursory review by key committees on critical matters; failure to insist on proper information flow from management; and an inability to appreciate the significance of information with which it was provided. There was no “sugar coating”, but rather a direct recognition of the full extent to which the inadequacies of board conduct contributed to the demise of the company.
The Report’s legacy also rests in its influential effect on the evolution of the corporate responsibility movement. It’s an impressive historical roll call. The Powers Report was a principal source for the subsequent July 8, 2002 Senate Permanent Subcommittee on Investigations report on Enron, which reached additional, complementary findings on the problematic conduct of the Enron board. The Senate Subcommittee Report provided substantial fodder for the governance and financial integrity provisions of the Sarbanes-Oxley Act, which was enacted on July 30, 2002. The governance failings cited by the Powers Report and, subsequently, the Subcommittee Report, formed the basis for many of the observations and recommendations incorporated in the ABA’s highly regarded “Cheek Report” on the role of lawyers in corporate governance. The lack of board compliance awareness identified in the Powers Report helped spark the 2004 Amendments to the Federal Sentencing Guidelines. These guidelines revised compliance plan effectiveness criteria to include specific board level plan oversight obligations. Finally, the Powers Report discussion on the role of Enron’s legal counsel contributed to the influential best practices on the lawyer’s role in corporate governance, proposed in 2006 by the Bar Association of New York City.
Many of today’s board members weren’t in office 10 years ago. Enron and its progeny are something of a distant memory to most. But the governance failings chronicled by the Powers Report were real. They happened 10 years ago and they could occur again, in another boardroom in another industry. The tenth anniversary of the release of the Powers Report is thus worth more an acknowledgment by today’s boards—for how the Report was prepared, what it said, what it ultimately influenced—and for a reality check on proper standards of board conduct.
Michael W. Peregrine, a partner in the law firm of McDermott Will & Emery LLP, advises corporations, officers and directors on issues related to corporate governance, fiduciary duties and internal investigations. Mr. Peregrine’s views do not necessarily reflect the views of McDermott Will & Emery or its clients.