Published March 2002

Lesson in Enron mess:
set high standards

In the Japanese story “Roshamon,” each narrator presents a different version of the same event. In similar fashion, the Enron mess can be seen from very different perspectives. To some, it is an accounting failure; to others, a scheme to defraud investors; and to still others, a move by the “suits” to enrich themselves at the expense of workers.

As managers, one useful way to look at Enron’s collapse is that it was a relationship failure, and, like most relationship failures, doomed from the start.

Actually, there were three identifiable relationship failures, each of which not only contributed to but also ensured the company’s self-destruction. Perhaps the only good thing we can say about them is that there are management lessons in each.

The first, and most fundamental, relationship that was all wrong was between the company’s top management and its Chief Financial Officer. And the reason was that they broke the fundamental rule applying to CFOs: There will be no outside transactions from which the CFO profits personally, period. It really doesn’t matter how much other money the CFO receives — in salary, bonuses, stock options, etc. — or how small the transaction is. It just can’t work because it just can’t be right.

The CFO is there, among other reasons, to be the corporate conscience and to examine financial transactions — making sure that each benefits the corporation and not someone else such as a supplier or an employee.

If the CFO is a party to or otherwise benefits from outside transactions, no matter how perfectly legal, fully disclosed and straightforward from an accounting standpoint, it becomes difficult within the company to draw the line between what is OK and what is not.

Another reason why the relationship with the CFO is so fundamental is that he or she is usually at the heart of two other key relationships. One of these is with the outside auditors.

Typically, the CFO is the person who selects the outside auditors and evaluates their performance. If the CFO is engaged in “related party” transactions, which the auditors must examine and report on, you have a built-in conflict of interest.

Nothing compromises an audit and depreciates its value faster than a company’s concealing transactions or failing to disclose some key information about them. The CFO should be looking for precisely the same things about the company’s financial picture as the auditors, and any transactions that he or she is involved with personally should be held up to especially intense scrutiny.

Most CFOs recognize that this comes with the job. If, as CFO, you drive a company car, for example, you can bet that its operating records as well as the details of its lease will be dissected by any outside auditors. And that is the way it should be.

The CFO is also central to the company’s relationship with its board of directors.

A solid, independent-thinking board is crucial to the health of any corporation, but it is dependent on the information it gets from the company.

Board members look to the CFO not only for accurate financial data on the firm’s performance but also for explanations of what happened and why. They also rely on the CFO to provide an element of reality when they are evaluating the forecasts and dreams put forth by the firm’s marketing and business strategists. If the CFO is thinking about his or her own interests, obviously, the advice given to the board could be tainted.

The overall management lesson in all this is that as managers, we have to establish and maintain many business relationships that involve ethical, behavioral or other standards that we might well find difficult or expensive to deal with. We would be very foolish, though, to try to sidestep or compromise those standards.

What would be the sense, for example, of shopping around until we found a fire sprinkler system inspector that would OK our creaky, leaky pile of pipes or an electrician to certify the wiring that Uncle Ralph installed during the weekend he went off his meds?

In the same way, we don’t pay good money to outside auditors so they can tell us what we want to hear. We expect them to examine our company thoroughly and tell us whether or not we pass the test.

One of the hallmarks of a company that is going to survive and succeed is the willingness and the ability to set high standards for itself — not just for the quality of its products but for everything it does.

Management’s job is to develop and maintain the relationships, internal and external, that will ensure that those high standards are met. It’s not always easy, but then, of all the worthwhile things in this life, what is?

James McCusker, a Bothell economist, educator and small-business consultant, writes “Your Business” in The Herald each Sunday. He can be reached by sending e-mail to otisrep@aol.com.

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