Bu-lat-lat (boo-lat-lat) verb: to search, probe, investigate, inquire; to unearth facts
Volume 2, Number 25 July 28 - August 3, 2002 Quezon City, Philippines
Titans of the Enron Economy
SCOTT KLINGER and HOLLY SKLAR
pivotal lessons from the Enron debacle do not stem from any criminal wrongdoing.
Most of the maneuvers leading to Enron's meltdown are not only legal, they are
widely practiced. Many of the problems dramatically revealed by the Enron
scandal are woven tightly into the fabric of American business. Outside the
spotlight on Enron's rise and fall, government policies and accounting practices
continue to reward and shelter many firms with harmful habits just like those of
Enron. We've ranked the 100 worst companies for each habit and awarded "Ennys"
for outstanding Enron-like performance. We've also given a Lifetime Achievement
Award to the corporation with the highest combined score for Enron-like
performance in all ten categories (a hint: Enron placed second).
Ten Habits of Highly Defective Corporations
1: Tie employee retirement funds heavily to company stock and let misled
employees take the fall when the stock tanks--while executives diversify their
holdings and cash out before bad news goes public. Winner: Coca-Cola.
upon a time the upward slope of Coca-Cola's stock price was as smooth as a cold
Coke on a warm afternoon. Over the past couple of years, however, the venerable
soft drink maker's stock fizzled like New Coke. Employees saw their 401(k)
retirement assets evaporate, with the stock down more than 31 percent in the
three years ending November 2001. Eighty-one percent of Coke's 401(k) was
invested in company stock. Not all employees fared poorly. Former CEO M. Douglas
Ivester left Coke under a cloud of controversy but received a severance package
valued at more than $17 million; it included maintenance of his home security
system and payment of his country club dues.
2: Excessively compensate executives. Winner: Citigroup.
Sanford Weill took home more than $482 million between 1998 and 2000. In 2001 he
made another $42 million. Weill's stock compensation plan was amazingly equipped
with a "reload" feature: Each time Weill cashed in his options, he
automatically received new options to replace them. Imagine if Citigroup
customers had a reload ATM machine that automatically added replacement money to
their accounts after withdrawals! While throwing money at its executives,
Citigroup rips off low-income Americans with predatory lending practices. The
Federal Trade Commission has brought suit against Citigroup, alleging abusive
lending practices; if all charges are proven, Citigroup's liabilities could
reach $500 million.
3: Lay off employees to reduce costs and distract from management mistakes.
Increase executive pay for implementing this cost-cutting strategy. Winner:
year Lucent axed at least 42,000 jobs. While these layoffs occurred during the
tech-industry tumble, Wall Street critics lay much of the responsibility for
Lucent's misfortune at management's door. Lucent was the only company to end up
on both the Fortune and Chief Executive 2001 "worst boards of
directors" list. Though the board took action and fired CEO Richard McGinn
in October 2000, it gave him a golden parachute of more than $12 million as a
4: Stack the board with insiders and friends who will support lavish
compensation and not ask difficult questions about the business. Winner: EMC
two years ago this leading producer of computer storage media could have held
Thanksgiving dinner in its boardroom: The chairman, Richard Egan, his wife and
son all sat on EMC's board. As a member of the board Junior got to help set
Dad's allowance (and help determine his own inheritance). How many kids wouldn't
love that? Of course, Dad might not have needed much help, since he also sat on
EMC's compensation committee, which determined his and other executives' pay.
Since winning this award, EMC has added an independent director to its board.
5: Pay board members excessively for their part-time service; pay them heavily
in stock so they have a disincentive to blow the whistle on bad business
practices that keep the stock price up. Winner: AOL Time Warner.
Time Warner is one of a growing number of companies to compensate directors
solely in stock options. In 2000, according to an Investor Responsibility
Research Center study, the potential value of these stock options (using
SEC-specified formulas for computing the present value) was $843,200 per
director--not bad for a part-time job. Each member of AOL Time Warner's board is
annually granted 40,000 stock options. Directors make money for each dollar
increase in the stock price. If AOL Time Warner's stock price rose $10 a share,
the options would gain $400,000 in value.
6: Give your independent auditor generous non-audit consultant work, creating
conflicts of interest for those charged with assuring that the company follows
the rules and protects shareholder interests. Winner: Raytheon.
it comes to shooting down auditor independence, military giant Raytheon is a
proven winner. According to an IRRC study, in 2000 Raytheon had the highest
percentage of non-audit fees for companies with revenue of more than $20
billion. Raytheon paid just $3 million to PricewaterhouseCoopers for audit
services and an additional $48 million for consulting services. That Raytheon's
independent auditor receives such large non-audit fees creates a substantial
conflict of interest and continues a pattern of board and management disregard
for shareholder interests.
7: Give campaign contributions to gain access to decision-makers; diversify your
political investments in a portfolio of candidates from both major parties.
Winner: Financial Services Industry. Accepting for the group, Citigroup and MBNA.
heavy lobbying and campaign contributions from the banking and credit card
industry, Congress passed the Bankruptcy Reform Act in 2001 by wide margins.
Credit-card giants Citigroup and MBNA were among the largest campaign
contributors during the 2000-02 period. On the very day the House voted on the
bankruptcy bill, MBNA contributed $200,000 to the National Republican Senatorial
Committee, according to a Time exposť. If it becomes law, the bill will make
filing for personal bankruptcy considerably more difficult; it will also put
credit-card companies in a more favorable position, allowing them equal standing
to claims for child support, for example.
8: Lobby lawmakers and regulators to eliminate pesky oversight, safety,
environmental and other rules, and pass favorable regulations, subsidies, tax
breaks and other items on the company wish list. Winner: Boeing.
its famed stealth technology in Congress, Boeing circumvented military
procurement practices when the Secretary of the Air Force directly submitted a
controversial contract under which the Air Force would lease 100 large tanker
aircraft from Boeing. Senator John McCain challenged both the process and the
terms of the deal, which he said would cause the government to pay much more for
the lease than if it purchased the planes outright. He added, "It's pork,
and we shouldn't be paying for it." Boeing has paid for plenty of pork and
prime rib, as the nation's fifth-largest lobbyist over the three years ending in
9: Get the government to finance and insure dubious overseas investments,
especially those opposed by the local citizenry. Winner: Halliburton.
Vice President Dick Cheney was CEO of Halliburton, a leading global energy
services and engineering/construction company, Halliburton received $1.5 billion
in government financing and loan guarantees, a fifteenfold increase from the
pre-Cheney days. The company also garnered $2.3 billion in direct government
contracts, more than double the amount received in the five years preceding
Cheney's half-decade tenure. Over the 1992-2000 period, in which Enron received
$7.2 billion in government financing and loan guarantees, Halliburton was close
behind at $6 billion. Not surprisingly, Halliburton doubled both its campaign
finance and lobbying expenditures, to $1.2 million and $600,000 respectively,
during Cheney's tenure.
10: Avoid taxes. Use tax deductions, credits and clever accounting to pay little
or no tax, and hopefully even get tax rebates. Winner: WorldCom.
you send or receive e-mail from an AOL account, fly on a commercial airliner or
make long-distance calls on MCI, you are consuming services provided by
WorldCom, the nation's largest operator of fiber-optics networks. WorldCom--now
in serious financial trouble--has grown over the years through a series of
dramatic acquisitions. These acquisitions, and the write-offs associated with
them, are the principal force behind WorldCom's tax avoidance Enny. Though the
company reported net income of $3.5 billion between 1996 and 1998, it received a
tax rebate of $112.6 million. Another piece of the $1.3 billion of tax breaks
WorldCom enjoyed over the three-year period came from stock options. Stock
option deductions shaved $265 million off WorldCom's tax bill between 1996 and
Achievement: General Electric
company demonstrated greater leadership in "Bringing 10 Bad Habits to
Life" than General Electric.