From my perspective, Enron happened at around the same time as the 9/11 attacks in the United States of America. I was in fourth year college then, and perhaps did not realize the significance of Enron. Enron was much in the news at that time, but was still somehow overshadowed by the events of 9/11 and the build-up to the wars in Afghanistan and Iraq. However, much in the same way that 9/11 significantly changed the world, so did Enron.
Bringing much upheaval
9/11 changed the way we travel, the way we looked at terrorism and the way we looked at national security. Airlines were made to install resilient cockpit doors. Airport security is now significantly stricter. Security forces are always on the lookout for terrorists. But in the financial world, Enron also brought much upheaval.
Financial reporting is now much more stringent and detailed. Before Enron, financial statements were much simpler compared to today. Enron pushed the passage of the Sarbanes-Oxley Act in the United States of America, which was followed by many other countries. It brought sweeping reforms to the financial industry, much in the same way 9/11 brought sweeping reforms to the airline industry. In the Philippines, the Securities and Exchange Commission adopted and mandated many of the changes in the international financial reporting standards, particularly relating to investments in subsidiaries and associates as well as related party disclosures (SEC Memorandum Circular No. 10, Series of 2002).
Propelling the trend
Moreover, Enron propelled the trend on good corporate governance. In the past decade or so, both the public and private sectors laid emphasis on good corporate governance. In the Philippines, for example, the SEC mandated publicly listed companies in 2002 to adopt a manual on corporate governance (SEC Memorandum Circular No. 2, Series of 2002). The SEC likewise implemented the self-rating system on corporate governance (SEC Memorandum Circular No. 5, Series of 2003), followed more recently by the annual corporate governance report (SEC Memorandum Circular No. 5, Series of 2013).
Non-profit organizations such as the Institute of Corporate Directors became more prominent in implementing the corporate governance scorecard system for publicly listed companies. In 2012, the Association of Southeast Asian Nations Capital Markets Forum developed the Asean corporate governance scorecard.
Preventing catastrophe
These initiatives by both the public and private sectors were aimed at improving corporate governance, especially among publicly listed companies. The lessons of Enron were hard learned, and in a concerted effort, the public and private sectors wanted to prevent a similar catastrophe.
Why publicly listed companies in particular? The reason is clear—publicly listed companies are most vulnerable to stock manipulation and fraud. Publicly listed companies obtain funds from the general public, and use these funds for some profitable venture. Investors hope or expect some return on their investment. These investors include small time investors, pension funds, education funds, and essentially a whole plethora of investors, many of whom are not giant financial institutions with an army of financial analysts. These funds must therefore be guarded, lest a situation like in the case of Enron happens where pension funds were wiped out.
The push for good corporate governance is a way to prevent Enron from happening again. It is, among others, a self-policing method, where, based on a company’s corporate governance score, an investor can decide whether he or she wants to risk investing his or her money in a company. If corporate governance had been available and practiced before the collapse of Enron, perhaps not too many people would have invested in Enron.
Changing the financial world
Yet, Enron happened, and it changed the financial world, much like 9/11 changed the world. But did Enron have to happen? Are the corporate governance scorecards really necessary? Perhaps they are, since there will always be people out there with malicious intentions. But, also perhaps, with the proper education and training, business ethics could be instilled in financial leaders, such that they would not commit these, although legal but nevertheless, fraudulent acts. One of the perpetrators of Enron, Jeffrey Skilling, was a graduate of one of the top, if not the top, business schools in the world. Was this business school lacking in business ethics education?
To many, business ethics as a class may seem superfluous and unnecessary because ethics is ideally inherent in everyone, as a natural law. People were not born to kill or steal. Yet, we all know and learned, sometimes in very hard ways, that the world is full of tests and challenges from people with devious minds, many times from very smart yet unethical devious business minds. There will be terrorist-minds willing to commit a 9/11 or Enron. But perhaps, with the proper education and mindset, we can prevent the development of these “terrorist-minds”. Hence, business ethics must definitely be taught in every business school, as ethics may not come as naturally to everyone as we had thought or hoped for.
The author is an MBA student at the Ramon V. del Rosario College of Business, De La Salle University. This article is part of his reflections for the course Lasallian Business Leadership with CSR and Ethics. Visit his blog at http://bongnard-dlsu.blogspot.com/.
The views expressed above are the author’s and do not necessarily reflect the official position of De La Salle University, its faculty, and its administrators.