 ast
week, the press's coverage of Enron suddenly turned serious. After
weeks of fruitlessly trying to make Enron into a Watergate-style political
scandal, it finally realized that the Enron mess raises important
questions about corporate governance, accounting standards, transparency
and other critical
issues that affect all businesses. On February 19, major newspapers
and representatives of the pundit class signalled a change in approach
to Enron with several important articles the same day.
The first piece
that caught my attention was by Richard Cohen, normally the Washington
Post's most reflexively knee-jerk liberal columnist. So it was
surprising to see Mr. Cohen defend former Enron chairman Ken Lay
from the "verbal mugging" he just received before a Senate
committee. Since everyone on the committee knew in advance that
Mr. Lay was going to assert his Fifth Amendment rights and say nothing,
calling him as a witness served no substantive purpose. All it did
was allow senators
from both parties to posture shamelessly in front of the TV cameras,
self-righteously denouncing Mr. Lay in sometimes vicious terms,
while he was forced to endure silently. It was a disgraceful performance.
The second
piece I found of interest was by E.J. Dionne, also in the Post.
Resisting the temptation to just bash capitalism, Mr. Dionne correctly
recognizes that the true conflict in business today is not between
owners and workers, but between insiders and outsiders. Managers,
who were on the
inside, appear to have manipulated the system for their own enrichment,
at the expense of outsiders, who included both workers and shareholders.
Following up
on the Dionne article was a front-page news story in the New
York Times by Leslie Wayne. It indicated that congressional
investigators are moving away from a narrowly-focused probe of Enron
political donations to a broader inquiry of accounting and financial
practices on Wall Street. While this could turn into a fishing expedition,
I believe there are serious questions raised by Enron, and especially
by the failure of its outsider auditor, Arthur Andersen. Wall Street
is terribly
worried that there are other Enrons out there. It is important to
find out if that is true and do something about it before there
is another financial implosion of a major company.
Finally, there
was an excellent series of articles in London's Financial Times
newspaper. As has been the case throughout American history, having
a foreign perspective can often provide insights missed by even
the most perceptive domestic observers. (It is worth noting that
British papers frequently publish essential news about the United
States absent from their American counterparts.)
Cutting through
the American press's obsession with campaign contributions as the
principal Enron story, the FT correctly views Enron as a
failure of the existing system of checks and balances. Part of this
breakdown is related to globalization. With all major companies
on earth becoming increasingly global and multinational, it is too
easy for them to shop around for the most favorable tax and regulatory
climate for their operations. One of the factors that led to Enron's
downfall was its offshore financial dealings in small Caribbean
nations, out of sight of shareholders, auditors, financial analysts,
and government regulators.
Thus the FT
notes that whatever reforms arise from the Enron wreckage need to
be worldwide in scope. At the same time, governments need to resist
the temptation to adopt tighter, more detailed regulations on companies.
This can too easily lead to an emphasis on form over substance.
Excessively detailed rules encourage complacency in financial markets,
as managers observe the letter of the rules while circumventing
their purpose.
As the FT
put it, "As long as you have complied with the manual —
or persuaded some luckless auditor that you have done so —
your real actions and purpose can be as reckless or flagrant as
you like. Since no set of regulations, no matter how detailed, can
outmaneuver a really determined manipulator, the rules provide,
in effect, a road map for abuse."
These insights
stand in stark contrast to the shallow focus on campaign contributions
that has been the main attention of Enron press coverage thus far.
I think it is no coincidence that the change in focus follows House
passage of campaign-finance reform. In effect, the liberal media
were hyping a non-story — Enron's political donations —
for the purpose of aiding passage of campaign-finance legislation,
which it favors in order to enhance its own power. Once the need
to do that passed, the press could finally report the Enron story
as something other than a political scandal.
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