ISSN (Print) - 0012-9976 | ISSN (Online) - 2349-8846

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Enron: Scandals and Governance

Scandals and Governance The conviction of Kenneth Lay and Jeffrey Skilling, former bosses of the now defunct Enron, on numerous charges of fraud and conspiracy comes at the end of a five-year effort of a specially constituted task force in the US to investigate the company. Enron

ENRON

Scandals and Governance

T
he conviction of Kenneth Lay and Jeffrey Skilling, former bosses of the now defunct Enron, on numerous charges of fraud and conspiracy comes at the end of a five-year effort of a specially constituted task force in the US to investigate the company. Enron’s bankruptcy in 2001 became one of corporate America’s biggest scandals, not only for the investor wealth it wiped out in one stroke, the $31.8 billion debt bill and the 21,000 workers it left unemployed, but also for the elaborate deceit that prevented the company’s true financial state from emerging before the public. The meltdown came only a few months after the Maharashtra State Electricity Board (MSEB) rescinded its power purchase agreement with the Dabhol Power Company that was also promoted by Enron in Maharashtra, and the plant was closed down over tariff disputes. Subsequently, the governments of India and Maharashtra entered into protracted and expensive negotiations with the equity holders and lenders to the project, to get it restarted.

Enron and other major instances of financial malfeasance by corporate behemoths, such as WorldCom, Adelphi and HealthSouth in the late 1990s have left a distinct legacy in corporate America. Apart from the enactment of the Sarbanes Oxley Act, which makes corporate directors criminally liable for falsifying company accounts and enforces stricter auditing rules, the string of scandals led to some soul-searching about corporate culture in the US and ignited debates about the need for better management, greater transparency and more effective corporate governance. In the financial capital of the US, New York, the state’s former attorney general, Eliot Spitzer has made something of a name for himself by going after corporate fraud in some of the biggest businesses, from insurance to mutual funds and investment banking. The exercise has revealed serious malpractices in a number of industries, which one might assume can be the prelude to reform.

In India, the Dabhol mess, even if it is of a different nature, has followed an entirely distinct trajectory though there are many lessons that could have been gleaned from the entire process. The role of multiple state and central financial guarantees that compounded the liabilities under the project, as well as the use of international arbitration by multinational companies to their advantage, could have benefited with some free and frank debate. The judicial enquiry commission that was appointed to investigate the process through which the government entered into such a blatantly one-sided contract was suspended by a stay order from the Supreme Court. To date, no responsibility has been pinned for this episode and even the negotiations for the revival of the project, under new ownership and a different name, were secret and outside the realm of public scrutiny.

Though the Dabhol contract was negotiated, quite disastrously, by the government, the recent Enron indictment brings us to the larger question of corporate governance in the country and the monitoring and prosecution of whitecollar crimes. In India, the ministry of company affairs is responsible for regulating the functioning of the corporate sector and administers the Companies Act, 1954. The present structure of the law and its institutions tend to accumulate a large quantum of small offences in the courts while large offences hardly get the kind of attention they deserve. The Registrar of Companies, for instance, lacks the authority to impose fines and penalties as well as to take penal action; thus even the smallest offence such as non-filing of returns under the act has to be tried. There are at present 45,000 such minor cases queued up in the courts that the government is considering waiving. The serious frauds investigation office (SFIO) that was set up in 2002 lacks teeth: it cannot launch an investigation suo motu but rather only upon referral by the ministry, a simple clause that is enough to thwart many a case. Besides, it can only prosecute companies under the Companies Act and there is some ambiguity about whether it can do so under the Indian Penal Code. Though the SFIO has recently attempted the latter, it remains to be seen whether the courts would find it acceptable.

The government has been planning a radical overhaul of the Companies Act based on the recommendations of the J J Irani Committee though a bill has not yet been presented in Parliament due to the lack of consensus between different ministries. The law will also include a provision on corporate governance that encourages “responsible self-regulation” by companies. It needs to be debated whether a separate law is required to prosecute corporate offences that are of a criminal nature. The legal infrastructure to administer and regulate the modern corporation certainly needs to be tightened at this juncture, for this will hopefully oblige corporations to respect the law.

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Economic and Political Weekly June 3, 2006

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