Businessweek Online

FEBRUARY 5, 2002

COMMENTARY
By Amy Borrus

Enron: Where Are America's CEOs?

So far, they're thunderously silent -- a big mistake that could create a backlash among investors, the public, and lawmakers

The collapse of Enron -- the biggest corporate bankruptcy in U.S. history -- has rocked Americans' perceptions of financial markets, accounting practices, and corporate ethics. The scandal has jolted the green-eyeshade profession into accepting prohibitions against mixing their auditing business with consulting work -- a change the Big Five accounting firms have resisted for decades (see BW Online, 1/31/02, "An Abrupt About-Face by Accountants").

Among the media, the implosion of the nation's seventh-largest corporation has set off a wave of soul-searching as critics wonder why usually vigilant journalists missed the signs of trouble. The reverberations are rippling through Washington, D.C., where lawmakers are itching to rewrite rules governing 401(k)s and campaign finance.

Yet if you listened to Corporate America, you'd never know that anything momentous has happened. The silence of the CEOs has been deafening. Top executives who rushed to reassure employees after September 11, who have spoken out forcefully on policy issues ranging from health-care reform to tax relief to trade with China, who have exhorted Washington to do something about the recession, are acting as if the Enron scandal never happened. After all, it has nothing to do with them.

"BLACK EYE." Perhaps it doesn't -- directly. But CEOs' reluctance to speak up about Enron's collapse and the issues it raises could hurt business in the long run. The scandal has cast a pall that, if it endures, could raise the cost of capital, renew suspicion about business interests at every turn, and give Congress a green light to reregulate with a heavy hand.

"Because no one has been saying anything, [the result] is a tremendous black eye for business generally," frets John Endean, vice-president of the American Business Conference, a Washington (D.C.) group of midsize companies. "It undermines employee and investor confidence in the entire business system."

Such warnings aren't resonating with CEOs, however. The only reaction to Enron so far has been a defensive crouch from businesses' Beltway lobbying groups, who are speaking out about pension reform. The National Association of Manufacturers, the U.S. Chamber of Commerce, and other big trade associations are frantically urging Congress not to mess with rules governing 401(k) retirement plans. That's politically shortsighted. Pension safety -- or lack of it -- is the issue that has generated the most public outrage in the wake of Enron's collapse, as thousands of loyal Enron employees lost much -- or all -- of their retirement savings.

RECHECKING THE BOOKS? CEOs' avoidance isn't surprising. Execs are understandably loath to speak ill of each other. Some corporate-governance experts think it's wiser to keep a low profile in the environment of suspicion created by Enron's collapse. Drawing attention to oneself or one's company could embolden whistleblowers or make regulators curious, warns Paul Lapides, director of the corporate governance center at Kennesaw State University in Georgia.

Indeed, many execs and auditers are probably busy double-checking their books, looking to see if their financial and accounting practices are beyond reproach. "It's probably [a case of] 'let he who is without sin cast the first stone,'" says John C. Bogle, founder of the Vanguard family of mutual funds. "Are there a lot of problems with off-balance-sheet financing? Of reporting pro-forma earnings? Yes. Corporate America is rife with those sorts of issues."

As the nation's companies hold their annual meetings in coming months, shareholders are sure to ask pointed questions about issues raised by Enron, from auditor independence to hidden conflicts of interest. By speaking out first, some experts argue, chief executives could gain the high ground and avoid distasteful and unnecessary grillings. Says Nell Minow, editor of The Corporate Library, a governance Web site: "I think a lot of them are walking into a minefield, and they're completely unprepared."

HIGHER RISK PREMIUM. The rumblings are ominous. Already, growing investor mistrust of companies' financial disclosures has sparked a damaging sell-off of shares in sectors ranging from energy to banking. A broad swath of companies could pay dearly if investors become convinced that financial shenanigans are commonplace. Says Bogle: "You are going to demand a higher risk premium on stocks. That means lower prices."

The negative impact of the scandal could reach beyond financial markets and color the way Americans view business in subtle but troublesome ways (see BW, 2/4/02, "BW/Harris Poll: A Growing Sense of Anger?") "It will make people suspicious about the market, about careers in business, about consultancies in organizations," worries Warren Bennis, University of Southern California management guru and best-selling author. "The reputation of American business is at stake."

And if execs keep mum about what policy changes are need to prevent more Enrons, Congress will barrel ahead with new laws and regulations that could be onerous to business.

SPEAK OUT. So what should the top-drawer managers do? At a minimum, experts say, they should take steps to ensure that their own accounting and financial-reporting practices are solid. Then they must speak out, reassuring consumers, investors, and analysts that they'll be vigilant about policing these practices. They must explain how they report their financial results and double-check auditing independence. "They need to speak more clearly about how the company makes money, where its profits come from," says James Champy, chairman of consulting for Perot Systems.

It wouldn't hurt to address the apparent ethical lapses that were endemic at Enron and talk candidly about what's acceptable behavior and what isn't. Lastly, CEOs shouldn't hide behind trade associations. They don't command the same attention and respect as managers speaking from direct experience.

This isn't a pleasant task. No CEO -- nobody, for that matter -- wants to shoulder burdens that aren't of his or her own making. Managing a company well and answering to shareholders is a tough job. But exceptional savvy is what's expected from the corner office. "Doing something before someone pressures you to do it is often what real leadership is about," says Michael Useem, management professor at the Wharton School of Business at the University of Pennsylvania.

Smart CEOs will anticipate the gathering Enron storm -- and plan their strategies.