On March 5, 2002, Kirk Hanson, executive director of the Markkula Center for

Applied Ethics, was interviewed about Enron by Atsushi Nakayama, a reporter

for the Japanese newspaper Nikkei. Their Q & A appears below:

Nakayama: What do you think are the most important lessons to be learned
from the Enron scandal?

Hanson: The Enron scandal is the most significant corporate collapse in the
United States since the failure of many savings and loan banks during the
1980s. This scandal demonstrates the need for significant reforms in
accounting and corporate governance in the United States, as well as for a
close look at the ethical quality of the culture of business generally and of
business corporations in the United States.

N: Why did this happen?

H: There are many causes of the Enron collapse. Among them are the conflict
of interest between the two roles played by Arthur Andersen, as auditor but
also as consultant to Enron; the lack of attention shown by members of the
Enron board of directors to the off-books financial entities with which Enron
did business; and the lack of truthfulness by management about the health of
the company and its business operations. In some ways, the culture of Enron
was the primary cause of the collapse. The senior executives believed Enron
had to be the best at everything it did and that they had to protect their
reputations and their compensation as the most successful executives in the
U.S. When some of their business and trading ventures began to perform
poorly, they tried to cover up their own failures.

N: Why didn't the company's directors protect the employees and investors?

H: The board of directors was not attentive to the nature of the off-books
entities created by Enron, nor to their own obligations to monitor those
entities once they were approved. The board did not pay attention to the
employees because most directors in the United States do not consider this
their responsibility. They consider themselves representatives of the
shareholders only, and not of the employees. However, in this case they did

not even represent the shareholders well-and particularly not the employees
who were shareholders.

N: Why didn't anyone stop Skilling, Lay and Fastow?

H: Jeffrey Skilling and Andrew Fastow changed the business strategy and
corporate culture of Enron. In the process, they appeared to make Enron very
innovative and very profitable. When the stock is rising and the shareholders
are getting rich, there is little incentive for the board of directors and the
investment community to question the executives very closely. The board is
at fault for permitting the suspension of Enron's own code of conduct to
permit the conflicts of interest inherent in the off-books corporations
controlled by Fastow. A few analysts recommended their clients stay out of
Enron, but not many.

N: Could you tell me how the corporate governance should be changed?

H: I do not think the rules of corporate governance will be changed in

significant ways. But boards of directors need to pay closer attention to the
behavior of management and the way the company is making money. In too
many American companies, board members are expected to approve what
management proposes-or to resign. It must become acceptable and
mandatory to question management closely. There is little chance the U.S.
governance rules will be changed to make boards responsible to the
employees as well as to the shareholders. However, board members would be
foolish not to pay more attention to how employees and customers and
business partners are treated. These greatly affect the long-term value of the
shareholders' investment.

N: Don't you think this scandal damaged the new economy's fundamental
system?

H: Enron is a prominent example of a "new economy" company. Kenneth Lay

and Jeffrey Skilling claimed that Enron was the most innovative company in
the United States and at times tried to intimidate reporters or analysts who
questioned their strategy. In the new economy, new kinds of companies have

been created. Enron's collapse will encourage investors, analysts, reporters,

and employees to ask "old economy" questions about these new economy
companies: How does this company make money? Can it sustain this strategy
over the long term? How do those who work in and with this company feel
about it? The new economy has lost some of its appeal after the collapse of
many dot.com companies and of Enron.

N: Can we believe analysts' strong "buy" recommendations from now on?

H: Many have questioned the overly optimistic "buy" recommendations

analysts have issued in recent years, fearing they had conflicts of interest
because of the underwriting business their firms did for dot.coms or because
of the investment industry culture which rewarded analysts who were bullish
on the new economy. I think there will be much closer scrutiny of analysts'
recommendations in the months and years ahead, and a close look at the
conflicts of interest of individual analysts. Analysts who are always bullish will
be less likely to be believed.

N: What reforms should Congress, the SEC, and others institute post-Enron?

H: I believe accounting regulations should be altered to prohibit ownership of

both auditing and consulting services by the same accounting firm.
Accounting firms are already moving to sever their consulting businesses.
The SEC should probably adopt additional disclosure requirements. Various
regulators should tighten requirements for directors to be vigilant and provide
protections for whistleblowers who bring improper behavior to public
attention. But, in the final analysis, the solution to an Enron-type scandal lies
in the attentiveness of directors and in the truthfulness and integrity of
executives. Clever individuals will always find ways to conceal information or
to engage in fraud.

N: How can credibility be recovered with investors?

H: U.S. firms and foreign firms listed on U.S. stock exchanges will need to
demonstrate that they have eliminated all off-books accounts which distort
the public's understanding of the financial health of the organization. They

may need to pledge that they will not suspend the company's code of
conduct, or at least report to the public when they do. Finally, every company
will need to demonstrate that its board of directors is vigorous, vigilant, and
that its procedures will enable it to uncover any questionable behavior.
Companies may need to adopt a set of "governance best practices" to regain
the trust of the market.

N: Some say Enron's collapse was caused by its stock options system. Do you
think the executive compensation system should be reformed, and if so, how?

H: The stock option system is not itself the problem. Excessive stock options
and excessive corporate compensation give corporate executives too many
incentives to manipulate the financial accounts and the stock price of the
company. When huge cash or options bonuses are dependent upon
achievement of one or a few narrowly defined profit or growth goals, the
temptation to manipulate the numbers to get the rewards will be too great.
The problem is not the stock option system but the excessive compensation
given to executives in the United States, particularly compared to the salaries
of regular employees of the company. U.S. companies should look more like
Japanese companies in the ratio of the salaries of top executives to those of
regular employees.

N: Will stock prices continue to be down because the investors' faith has been
shaken? The other day the blue chips like GE and IBM had to reassure
investors about the strength of their financial controls.

H: I believe the stock prices of new economy companies will continue to show
an "Enron effect" for many months to come. Until an individual company
convinces the market that it has rid itself of any questionable practices and
has improved its governance systems, it will not be evaluated fully.

N: Don't you think this kind of scandal will be a bad influence on the U.S.
economy, which
is recovering from recession?

H: Enron has clearly done some damage to the U.S. economy, but it will not
hold up recovery from the current recession. The fundamental health of the
U.S. economy is strong and now getting stronger. Some individual new
economy companies will have depressed stock prices for some time, but
they, too, will recover as they demonstrate that they are prepared to prevent
Enron-like behavior.

N: You mentioned in Newsweek magazine that Enron will become the morality
play of the new economy. Could you give me a more concrete idea what you
mean by this?

H: I do believe Enron will be the morality play of the new economy. It will
teach executives and the American public the most important ethics lessons
of this decade. Among these lessons are:

You make money in the new economy in the same ways you make money in
the old economy - by providing goods or services that have real value.

Financial cleverness is no substitute for a good corporate strategy.

The arrogance of corporate executives who claim they are the best and the
brightest, "the most innovative," and who present themselves as superstars
should be a "red flag" for investors, directors and the public.

Executives who are paid too much can think they are above the rules and can
be tempted to cut ethical corners to retain their wealth and perquisites.

Government regulations and rules need to be updated for the new economy,
not relaxed and eliminated.

Case 1: Enron Corporation (Reflection paper)

SABITA BARAL
Case 1: Enron Corporation (Reflection paper)

Enron Corporation was one of the largest global energy, services and
commodities companies, before it filed bankruptcy (Kurdina, 2005). All the
officers and employees of Enron Corp., its subsidiaries and affiliated
companies were supposed to follow Enron Code of Ethics which was approved
by the board of directors. Enron Code of Ethics consists of: Respect, Integrity,
Communication and Excellence. In 2000, the reported revenues of the
company made $101 billion and approximately $140 during the first three
quarters of 2001 to declaring bankruptcy in December 2001. As a result of
the scandal, thousands of people lost their jobs, some people lost their entire
pensions, and all of the shareholders lost the money that they had invested in
the corporation after it went bankrupt.
Enrons Top Leadership: After the bankruptcy of Enron numerous executives
such as former chief financial officer and treasurer were found guilty. They
were engaged in money laundering, fraud and conspiracy. They violated the
Enron Code of Ethics i.e. respect, integrity, communication and excellence.
Andrew Fastow, former CFO, trading companies have intrinsically volatile
earnings that arent rewarded in the stock market with high valuations on the
other hand high market valuation was necessary to maintain Enron from
collapsing.

Unethical Corporate Culture: The overall corporate culture depicts the

arrogance in each level of the company. The employees believed that they
could deal with extra risk without any danger. The undeclared message was
you can make as much money you want until you dont get caught. The
corporate culture took very less efforts to promote the code of ethics. Instead
the company gave more emphasis on decentralization, employee appraisals
and its compensation program. Each Enron division and business unit was
separate from others and there were inadequate operational and financial
controls. The compensation plant put the employees first rather than its
shareholders and buoyant employees to crack the rules and inflate the
contracts even though no real cash generated.

Complicity of the Investment Banking Community: Enron was engaged with

highly reputed firms such as Citigroup, J. P. Morgan and Merrill Lynch and used
prepays. Prepays were basically loans that Enron booked as operating cash
flow. The poor performing asset, at the end of quarter used to sell it back to
the company at a profit once the quarter was over and the earnings had been
booked.