As the Enron meltdown continues to unfold, analysts of every kind are searching for the deeper meaning in this catastrophic corporate collapse. Left-leaning pundits have used Enron's failure to decry what they perceive as the inherent and systemic corruption of corporate America. They choose to ignore the fact, however, that any system or governing structure is only as good as the people who administer it. In the case of Enron, the need for morally informed corporate governance, founded on solid moral reasoning, has been quite clear.
In her letter to Mr. Lay, Ms. Watkins not only highlights the need for morally discerning corporate officers, but also offers a sound insight into how the free market responds to morally questionable behavior on the part of business executives. In commenting on the off-balance sheet accounting arrangements employed by Enron to obscure massive losses, she offers that “the business world will consider the past successes as nothing but an elaborate accounting hoax.” No doubt, many investors felt the same way and responded by selling their Enron holdings en masse. The consequences of this loss of investor confidence in Enron management are now familiar to all. The loss of investor confidence in Enron, however, does not rectify the harm done to many investors, most notably many of Enron's own employees, whose life savings have been wiped out to due to executive malfeasance.
It is truly shameful that Enron executives failed to heed Ms. Watkins advice to come clean on the questionable and, perhaps, illegal arrangements devised to obscure the real financial condition of the company. This failure on the part of Enron's management, however, should not serve to indict the structure of corporate America. Rather, it should serve to illustrate the need for a properly formed moral culture among those called to the vocation of business and commerce. Any structure, corporate, government, or otherwise, is susceptible to the failings of the individuals involved. The foundational convictions of business life should be sound moral reasoning and the desire to accomplish moral good in serving a customer. In the case of Enron, the company's executives defaulted on more than loans. More significantly, they defaulted on their responsibility and accountability to shareholders and customers.
This breach of the public trust between the company and its shareholders cannot begin to be restored until moral accountability is achieved and restored. Sadly, the respected law firm of Vinson & Elkins has continued to aid Enron executives in their shaky moral reasoning by affirming the very practices that led to the company's demise. In a report obtained by the Wall Street Journal, Vinson & Elkins attorneys argue that “Enron's practice of forming special-purpose entities to keep debt off the books was creative and aggressive, and that no one has reason to believe that it is inappropriate from a technical standpoint.” It might well be accurate to say that company executives are correct from a “technical standpoint,” but it is clear that many shareholders found the company's practices “inappropriate,” even if corporate executives were legal from a “technical standpoint.” Certainly, the loss of confidence in and financial collapse of the company indicates that something was “inappropriate” in their conduct of Enron's business.
Such a legalistic approach to moral reasoning may keep Enron executives out of jail and clear of liability (which remains to be seen), but it will not revive a corporation once heralded as the corporate model of the twenty-first century. Furthermore, such a crassly pragmatic approach to moral reasoning in corporate governance – an approach that replaces solid moral conviction with acrobatic legalisms – serves to further undermine the credibility of corporate institutions. No doubt, such tactics lead to a deeper cynicism concerning the business structures that are at the foundation of American leadership in business and commerce.
In responding to the vocation of business and commerce, one assumes the obligations of moral leadership associated with that vocation, which include accountability, honesty, and transparency in governing the corporation. Abdicating such leadership in attempting to cover poor management decisions is something that cannot stand if our society is to strive to be both free and virtuous.