Man Without Qualities

Tuesday, February 26, 2002

More on the Vast Enron Conspiracy

The Los Angeles Times reports that Treasury Secretary Paul O'Neill is heading a task force looking into the question of whether government disclosure laws need to be tightened following the collapse of Houston energy giant Enron Corp. The Times reports that in a Monday interview on CNBC, O'Neill said, "When we have people that intentionally mislead or defraud shareholders or employees, then we ought to punish them to the fullest extent of the law."

Yes, that much is clear. If, as many of Enron’s woolier critics have maintained or implied, the company and its management have obviously committed intentional fraud in the preparation of the company's financial statements, then that should be enough. No new laws are needed. The matter is settled.

So why does the Times also report that “O'Neill's task force is considering changing the standard to one of negligence, clearing the way for punishment if it can be proven the executives should have known what was going on and moved to correct it.

Well, if Mr. O'Neill, others in the Administration and their Democrat critics are beginning to understand that it is going to be difficult to tag Enron and its representatives with more than negligence – at least on the big ticket items – it would certainly make sense that Mr. O'Neill’s task force would want to say that they had applied themselves to closing that "loophole.”

But one hopes that someone on that task force is giving thought to whether shareholders would be well served by a change in the law that allowed for "punishment" of directors and officers of public corporations for mere negligence. What substantial person would accept such a position in the presence of such a law, and what would he or she demand to be paid for accepting such a risk? Is it really possible to imagine well-meaning "outside" or "independent" directors signing up - only to be punished if they are found to have been merely negligent.

Directors are already civilly liable for negligence under state corporate laws - but civil liability is not "punishment." Moreover, even the prospect of civil liability is avoided if directors comply with the so-called "reasonable business judgment rule." It is the "reasonable business judgment rule" that will likely insulate the Enron board from civil liability. Any significant weakening of "reasonable business judgment rule" protection would render it virtually impossible for a public company to attract anyone to its board who has significant assets - assets which would be exposed to shareholder lawsuits. The consequences of having only directors with no significant assets have been discussed here before.

So, unless the members of Mr. O'Neill’s task force think that shareholders of public companies would be well served by being able to hire only directors and officers who have not shown any prior ability to acquire wealth, and who would be more vulnerable to corruption and bribes than wealthier alternative hires, then the task force had better regard the possibilities of making mere negligence "punishable" or significantly weakening "reasonable business judgment rule" protection as sacred cows to be patted as the task force passes by. Or God help us all.

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