As the Enron (ENE) controversy continues to swirl, virtually everyone is being hit with opinions as to who is to blame. Currently, the leading candidate seems to be the public accounting firm Arthur Anderson & Co.  In fact, Enron Chairman Kenneth Lay formally fired the firm last week, seemingly for the accounting firm's inability to save him personally and Enron from themselves. What a laugh!  Could any of this blame that is being heaped on Anderson have anything to do with the fact that Anderson may be the only one left in the loop that has any money left?  Maybe we should rename this column, at least for today - Common Sense and Horse "bleep".

While it can surely be said that there is plenty of blame to go around, I think as investors we should pay particular attention to the role of the Enron Board of Directors in this debacle. The main reason is not to vilify, although a little of that is justified, but to learn if the disease afflicting that group is more widespread. As a way of review, the Board of Directors is a group of people elected by the shareholders to essentially oversee the governance of that company. Main specific duties are in determining corporate purpose, approving any changes in corporate structure or new affiliations, approving budgets and capital spending, and selecting and firing the Chief Executive Officer of the company. The Boards of non-profit concerns may have some additional altruistic duties, but Board members of a firm such as Enron basically work for the shareholders of Enron.

Like I said, Common Sense and Horse "bleep".  Does anyone think it means that an independent search committee made up of prominent shareholders scours the earth for independent thinkers and shareholder watchdogs, then introduces them to the CEO after their election to the Board? How naïve a concept. That would not work for the CEO, he would say we (management) are looking for "team players" who have shown an ability to "work with management" to get things done and not get "bogged down" by "divisiveness at the Board level". The best way for that to happen in their mind is usually for the CEO to run one or two names of "superior" candidates by some sort of nominating committee. You really would not want many candidates to actually be interviewed in the nominating process because "If I approach an individual of that caliber for a seat on our august Board, he or she will not stand, mind you, for the disgrace of the committee saying he or she did not make the cut". In other words, the practical situation is that most CEO's are very involved in the selection process, interesting since the main duty of the Board member is to hire and fire the CEO. It certainly can be argued that this absurd selection process is designed to firmly convince the new Board member that he or she is beholden to the CEO specifically, not the shareholders at large. Common Sense and Horse "bleep"?
              
What does a Board really do? How are they compensated? There usually are a prescribed number of scheduled meetings per year, as well as any amount of special meetings at times of stress or specific deals. Individual members of the Board also may serve on one or more committees, such as the audit or compensation committees. I believe that on Enron's Board, former CFTC Chairman Wendy Gramm was Chairman of the Audit Committee. Compensation varies, but has generally been moving up rapidly from the historical Board stipend not designed to create an employee, to numbers in the low to mid six figures. Also, many Boards are issuing stock options essentially to themselves. I suppose there is less chance of reigning in compensation for the un-deserving CEO if the Board members are hanging with him at the same trough.
               
Where is all this leading, other than to cause us to shake our heads?  I think it is a safe bet that the average shareholder should not have this image of the average Board member working for him or her. If so, you might see Microsoft share some of their $36B cash balance with the shareholders in the form of a dividend. Does anyone really think that the individual Enron Board member understood the ramifications of their myriad off-balance sheet concoctions? Don't try and understand, just vote yes. What about the letter to employees in August by Chairman Lay telling employees the stock was sound, or the ruling that employees were frozen in their 401k plans. Look the other way!  Sadly, there are a lot of "past their prime" old guys that see this as a way to keep active, while trying not to embarrass themselves. Also, and probably politically incorrect, many Boards are trying to catch up on women and minority representation. The temptation for these people is the promise of multiple Board opportunities if you behave. Just don't ever let yourself be described by the CEO when asked about your behavior as a director - "Joe was never afraid to ask the tough questions, and you always knew he had the good of the shareholders in mind". Good luck at Wal-Mart with that new greeter job, Joe.
               
It is very difficult to generalize what is in the mind of a Board member at Enron or any other company. It really comes down to the effective use by the CEO of the flawed selection process and the skilled use of small group dynamics in the meetings. As a veteran of six years Board service at the CBOE I am well aware of the pressure, subtle and otherwise, to be a team player. It is hard to constantly remember who you represent, and it has nothing really to do with being a team player on the CEO's personal team. As for judging the honor and integrity of others, I will bet any one of you $1 that with all the absurd pay scales, bonus arrangements, semi-legal partnership deals, etc. that we will hear about in the next several years in this industry and others, we will not hear of more than five public resignations for cause by the Board members of those companies. The trough is way too cozy.

We'll get back to Order Execution on Thursday.

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