Critical Education Articles Placed in the Teacher Staff Lounge While I Was a Teacher, Part Twenty-Five: Enron and Corporate Governance by a Minority as Anti-Democratic Even If It is Government-Regulated

When I was a French teacher at Ashern Central School, in Ashern, Manitoba, Canada, I started to place critiques, mainly (although not entirely) of the current school system. At first, I merely printed off the articles, but then I started to provide a summary of the article along with the article. I placed the summaries along with the articles in a binder (and, eventually, binders), and I placed the binder in the staff lounge.

As chair of the Equity and Justice Committee for Lakeshore Teachers’ Association of the Manitoba Teachers’ Society (MTS), I also sent the articles and summary to the Ning of the MTS (a ning is “an online platform for people and organizations to create custom social networks”).

As I pointed out in a previous post, it is necessary for the radical left to use every opportunity to question the legitimacy of existing institutions.

The attached article for the ESJ Ning is prefaced by the following:

Hello everyone,

Attached is another article for the ESJ Ning. It is prefaced by the following:

 

David Brennan article, “Enron and Failed Futures: Policy and Corporate Governance in the Wake of Enron’s Collapse,” was published in 2003—a few years before the widest and deepest economic crisis in the world since the 1929 crash. In that article, Brennan analyzed some of the reasons for the Enron fiasco and some of the proposed solutions. His article is even more relevant today than it was nine years ago.

Brennan looks at some of the analyses of the problems that led up to the collapse of the Enron Corporation and the proposed solutions to the problems. He concludes that those solutions overlook that the problem is primarily due to the corporate nature of modern capitalism and that regulation will at best mitigate but not eliminate the danger of major financial crashes.

Another interesting conclusion is that the collapse of major corporations now are socialized—that is to say, the taxpayers foot the bill for the financial disaster.

 If true, would not equity and social justice require that those who have to pay for the disaster have control over the decision-making process; the principle is simply that those who suffer the consequences of decisions should be able to participate in the formulation of the decisions in the first place.

Let us see how Brennan comes to these conclusions.

 Corporate directors of Enron received exorbitant sums of money when the employees of Enron, who had about 63 percent of their pension money invested in Enron, lost their pension, as did other investors. This leads to Brennan’s conclusion that the economy is not subject to democratic controls—even by many investors. Indeed, modern capitalist corporations are becoming more opaque in their operations, and the public—including investors—find it difficult to determine what the corporation is doing or how well it is operating.

There is, then, a paradox. On the one hand, the consequences of large corporations are socialized (workers foot the bill, ultimately, if there are losses), but the decision-making process is increasingly hidden from the workers’ purview.

One of the problems that became evident only after the collapse of Enron was Enron’s political contributions to political parties; a number of individuals with ties to Enron were appointed to government positions. There was, then, a ban on contributions by corporations of soft money (campaign money raised and spent by political parties). However, alternative means could be found to fulfil the same function.

A larger issue for Brennan is who decided to contribute investors’ money in the form of political contributions in the first place. He hypothesizes that it was the CEO and the board of directors, and the two together are really answerable only to themselves. They need not, for instance, provide evidence that political contributions did in fact lead to greater investment opportunities.

Another element in the Enron scandal was Arthur Andersen’s double function as consultant and auditor. The Securities and Exchange Commission inquired into Enron after Andersen reported a substantial reduction in equity for shareholders after Enron initiated a new partnership scheme, which saw, among other things, increased executive remuneration. As a result of the inquiry, Enron was obliged to revise its equity losses by over four times its earlier estimates.  Several executives or directors were aware of the shady accounting practices.

As a result of Enron accounting practices, guidelines have been enacted to ensure increased transparency and accountability. Brennan does agree that some increased control over corporate accounting will probably ensue so that investors (and employees) will be able to determine more accurately the financial situation of corporations. However, he points out to two problems. Firstly, regulations always lag behind actual practices, so there will be a leap-frog approach to corporate wrong doing: regulations emerge, and corporations figure out ways to circumvent the regulations with, possibly, disastrous results, which result in further regulations. Secondly, it can be difficult to determine whether the accounting practices are clearly against the regulations because of the accounting standards that all accountants use in the first place.

Changes in reporting practices, furthermore, will unlikely have much an impact on possible conflicts of interest between consulting and auditing. Accounting firms, at least in the United States, are dominated by a few monopolies that establish the standards in the industry.

Brennan argues that the problem was not really in the accounting practices per se but with the establishment of the partnerships; the directors of Enron made bad business decisions by forming the partnerships in the first place. The decision to form the partnerships was made with the knowledge and approval of the board of directors of Enron.

The problem of Enron employees losing a major part of their pension fund could have been reduced by introducing controls on how much equity employees can possess in a corporation for which they work. However, although this would address the specific problem of employees losing an important source of deferred income, it would not solve the problem of investors in general losing what they had invested.

Policy changes to address the problems specified above would undoubtedly improve the situation—but according to a minor degree. The major problem, which none of those policies address, is corporate governance.

Brennan points out that there are two organizations that have sought to control corporate governance: the Council of Institutional Investors (CII) and the AFL-CIO. The CII seeks to ensure that boards of directors have few ties with the corporation which they direct apart from their function as members of the board. It provides a “target list” of corporations with bad corporate governance in order to shame such corporations in to changing their ways.

Similarly, the AFL-CIO seeks to have members of boards of directors to be independent of CEOs and managers of the corporation. Both the CII and the AFL-CIO have identified a major problem with modern corporations: the boards of directors act in their own interests and make independent decisions that can have major consequences for employees and investors. Brennan notes that boards of directors do make the decisions concerning the distribution of profits, and he identifies this function with the function of capitalists. He claims that this function of appropriating and distributing profits makes the board of directors the capitalists of the corporation. Such a view forgets that there exists an army of managers and supervisors who attempt to oblige workers to work as much as possible. The appropriation of what Marxian economists call surplus value (the value that workers produce in excess of their wage—hence their exploitation) requires the surplus value to be produced and not just appropriated and distributed. The concept of a capitalist is more complex than Brennan’s definition.

Brennan also attempts to group investors and employees within the same group. Marxian economists would disagree with such a grouping since employees are the ones who produce the surplus value (which forms the basis for capitalist profit)—not the investors. We should not slur over the fundamental difference in function and interests between the two. Many small investors may indeed be other employees who have saved some money and invested it to supplement their income, but some investors may also be capitalists (those who may work but need not because they can live on their invested income or because of their function within the capitalist system). The level of investment may be such that they be able to influence the decision-making power of boards of directors indirectly, but that is an empirical question that requires research.

Nonetheless, the board of directors are certainly key capitalists with the modern corporation.

Brennan’s general point is that justice requires that those are who are affected by decisions should have a say in the formulation and carrying out of those decisions. No such justice prevails in corporate governance.

Given the CII’s and the AFL-CIO’s call for boards of directors to be governed at arm’s length from other managerial staff, it would seem logical to suppose that after the Enron scandal boards of directors would be more closely controlled. This is not the case. It is as if Enron did not happen. For example, the corporation Lucent reported that its CEO received about $38 million in compensation—while investors received around a 75 percent decrease in their returns.

Could we not say the same thing today—even more so?

Brennan pinpoints the weakness of both the CII and the AFL-CIO in their attempt to bring the issue of corporate governance to the forefront of economic and social policy: they want to control capitalists without questioning the capitalist system. They remain wedded to the capitalist way of doing things and cannot imagine any other possible way of doing things. So their solution remains only to control capitalists rather than replace them with more democratic structures. Increased control over corporate governance is not to increase democratic structures within the economy for their own sake—but to increase the value of equity by ensuring that the boards of directors act primarily for that purpose.

Economic democracy is not on the agenda for either the CII or the AFL-CIO.

Ultimately, they want boards of directors to function as better capitalists rather than develop democratic economic structures.

Brennan points out that boards of directors, legally, have been given wide decision-making powers and need not answer immediately to investors, employees or consumers. Their responsibility lies with the corporation and not with any other group—including shareholders. Boards of directors also have the legal authority to manage the corporation (hence the difficulty of keeping them separate from the CEO and the senior managers of the corporation).

Brennan does have an extremely interesting point: those who advocate for corporate governance want to do away with capitalism without doing away with capitalism. They want to have all the benefits of capitalism without having any of its disadvantages (an observation that Karl Marx made long ago about other social reformers).

Given the recent loss of $2 billion by J. P. Morgan, we will undoubtedly continue to see economic crises—such is the nature of a capitalist economic system. Economic crises are the means by which the capitalist economic system lurches forward.

We certainly do live in interesting times.  For the working class, their lives have been disrupted and in many cases ruined. Such is the justice and equity in a capitalist economic system. Should those who are concerned with social justice and equity not focus on these issues?