Sherron Watkins: Did We Learn the Lessons From Enron?

Sherron Watkins is the former vice president of Enron Corporation who alerted then-CEO Ken Lay in August 2001 to accounting irregularities within the company, warning him that Enron “might implode in a wave of accounting scandals.” She has testified before Congressional committees from the House and Senate investigating Enron’s demise. Time magazine named Sherron, along with two others, Coleen Rowley of the FBI and Cynthia Cooper of WorldCom, as their 2002 Persons of the Year, for being “people who did right just by doing their jobs rightly.”

Now an independent speaker and consultant, she is co-author of Power Failure: the Inside Story of the Collapse of Enron, (Doubleday, 2003).

Prior to joining Enron in 1993, Ms. Watkins worked for three years as the portfolio manager of MG Trade Finance Corp., a commodity lending boutique in New York, and for eight years in the auditing group of both the New York and Houston offices of Arthur Andersen.

Ms. Watkins is a certified public accountant. She holds a master’s in professional accounting, as well as a B.B.A. in accounting and business honors from the University of Texas at Austin.

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Ethix: Was there a time when you really enjoyed your work at Enron?

Sherron Watkins: Between 1993 and 1995, Enron’s business was growing; the Jedi portfolio that I was working on in the finance area was a lot of fun. We were loaning money and investing in various oil and gas companies. It was exciting to see them have their dreams realized with our financing. And we were making money on the financing.

When did it start to change?

Watkins: The warning signs of fraud were there in 1996, and I now take those much more seriously than I did back then. In 1996, I simply protested, got nowhere, and switched divisions.

In 1996, the capital and trading division of Enron, run by Jeff Skilling, was on the wrong side of a gas trade and was facing a losing quarter. There were lots of meetings trying to figure out how the earnings shortfall was going to be filled. That is when “fair value” was created.

Enron was marking its commodity contracts to market and that was fairly legitimate. With fair value accounting, they took this idea to a new level. They purchased a publicly traded company and took it private, with the intent of revamping it and taking it public again in five or six years. Just 27 days after the deal closed, Enron was raising its value by 50 percent. That flies in the face of generally accepted accounting principles. The fair-market value is what two arms length parties will pay for something. By saying this company is worth 50 percent more in just 27 days, they are claiming they hoodwinked the market somehow. This was an oil and gas development company that had drilled eight wells in those 27 days; seven of which were successful. The success was the reason given for the revaluation; however, the company’s property development plan was all infill shallow drilling. These companies typically drill 100 wells in a year and 80 percent of them are supposed to be successful, so this is no basis for raising the value. A widget maker cannot say it is worth more because they successfully produce the number of widgets they usually produce. I thought that was way over a line and protested to some Arthur Andersen partners I knew, and internal people, but did not get anywhere.

Then Andy Fastow (CFO) asked me to lie to one of our investors, and it was just a horribly uncomfortable situation. The fair-value accounting was happening within the Jedi portfolio, which I ran. I was not in the accounting department, but I did not want my name associated with that practice. So I moved to Enron International. The time period I worked at Enron International may have been the happiest at Enron. It ran like a normal company. Rebecca Mark and Joe Sutton, the two people running the division, were heavily involved in the details. They crunched numbers and routinely turned things down that did not have a completely rosy outlook.

But things went haywire in 1999 when Jeff Skilling decided to disband Enron International and pump up Broadband. So I would say the worst time was from Broadband on, basically 2000 to the end in late 2001.

A Personal Challenge

Did you think about quitting? Just walking away from it?

Watkins: Certainly I thought about quitting in 1996, but I had not yet made vice president. Back in those days nobody in Houston would have believed you would leave Enron. Enron was the cat’s meow up until 2001. You do not get hired as a director and leave as a director. People would think you were being pushed out.

After I made vice president, my personal situation had changed. I had married and had a baby, and I wanted to have a second baby. When I transferred into Broadband after the demise of International, I became very disillusioned about the direction of Enron and had a personal crisis. Do I look for another job or do I try to have a second baby and then go? A successful maternity leave that doesn’t hurt a career only happens when you are established long term at a company. So I was planning to have that second child and then leave. I never had the second baby.

Factors in the Enron Failure

What were the contributing factors in Enron’s behavior?

Watkins: One of the major factors to the downfall of Enron was the performance ranking process. It was known as “rank and yank” and it was fairly brutal. Every six months your name was on a table with your peers. Early on in the ’90s, they would rent a big conference room at a hotel, off site so you could not go back to your office. Literally, it started at 8 in the morning and you would not be able to leave. Many times I was there until 2 in the (next) morning.

By saying this company is worth 50 percent more in just 27 days, they are claiming they hoodwinked the market somehow.

We reviewed all of the categories of people from admin to senior specialist to manager to director, and each category was rank ordered, initially with placards on the table. Someone would come by and say, “This &&&%#@” does not deserve to be up here. They did X, Y, Z to me, so they are down here.” It resembled an Animal House fraternity selection process. Each employee’s picture was up on the wall, projected electronically. They punched the button and looked at the bell curve, force fitting people into groups from excellent to poor. There were only 5 or 10 percent of the people in the top category, 10 or 15 in the next, etc. Category four was a dangerous position, and category five meant you are going to be out of the company. People were always thinking, what have I done for Enron lately, what are people going to say about me on that table?

GE supposedly follows a similar process, but they value the right things. The things that put you at the top of the table have stayed in line with the company’s core values. At Enron what put you at the top of the table were earnings. The means by which you generated those earnings did not matter, and that is where it started to come apart. Everyone was focused on the earnings they were generating.

So as these questionable deals were done, I witnessed smart people scratching their head but never understanding the problems. For example, they set up the Raptors structures, off balance- sheet companies funded with the promise of Enron stock. It was like a company not selling enough widgets, so they set up a company to buy the widgets and funded this new shell company with a promise of their own stock. The original company then sells the shell company widgets so that sales figures remain on target. The plan was that the shell company would then sell the widgets in the marketplace for cash; however, if the shell company is unable to sell the widgets out to third parties, then that shell company is able to access that pile of stock from the original company to raise cash and pay the amount owed for the widgets. Business and accounting does not work that way, but that was in effect what Enron was doing.

Smart people stopped asking questions.

People would hear about the deals and not understand them. But they were under so much pressure for their own deal closings and earnings that they would say, “I know Arthur Andersen looked at this and they blessed it. I don’t have time to focus on understanding it.” Smart people stopped asking questions. They did not have time to get to the bottom of something that was bothering their gut, because they had to focus on that next deal. Some were concerned, such as the head of our Control and Risk Management, Rick Buy, and Vince Kaminski and some of his folks. In the end, they could not pursue it as far as they would like because of that “rank and yank” treadmill.

Blowing the Whistle

Can you talk a little bit about the process you went through that led you to decide to write the memo to Ken Lay? How did you evaluate that decision?

Watkins: Well, there was no process. Literally it was simply a reaction. I had gone back to work for Andy Fastow in the summer of 2001. I stumbled across these Raptors in the course of my work in July, and understood that they were capitalized with Enron stock. I started interviewing with Enron’s competitors in earnest. I wanted out as soon as possible. I put my family plans on hold and just said I have to get out of here. I cannot work for a company that is committing such fraud.

I planned to meet with Jeff Skilling on my last day, when I had a contract with another company. But I will tell you, it was going to be tough to get up the courage to meet him because he really was kind of a ruthless “take no prisoners” type of guy. So I was even worried about it with the safety net of another job. But then he quit, which surprised everyone. The picture of the Titanic came quickly to mind. I was a crew member seeing the water come in, and Skilling’s resignation was like the last partition breaking. It was the final piece of evidence that what I was seeing was really bad, and that he knew what was coming.

He quit on a Tuesday, and on Wednesday morning I typed an anonymous letter and sent it to Ken Lay, knowing that an all-employee meeting was coming up on Thursday. They had a process for looking at these things and I just wanted to float it up there so if he was really looking for the reason Jeff Skilling was leaving, maybe he would inquire about it. I went to the all-employee meeting, and Ken Lay was talking about our values: respect, integrity, communication, and excellence. He was the kinder, gentler face of Enron. He got this tremendous standing ovation when he announced that he was stepping back in as CEO. He said that our vision and values had slipped, that we need to get back to our core values. And he said if anyone is truly troubled out there about anything that Enron is doing, please feel free to speak to Steve Kean, Cindy Olson (the head of human resources), or himself. But he didn’t say anything about my memo.

I met with Cindy Olson that very afternoon. When I showed her the page I had sent to Ken Lay, she said, “Ken gravitates toward good news. He probably showed this to Rick Causey, the chief accounting officer, and to Andy, and they said there is no basis for concern. So he just threw it away. For him the issue is resolved. But he does better meeting people face to face. Would you be willing to meet with him?” I agreed to identify myself, and set up a meeting with him for the following week. That is about all there was to my thinking process.

What was your expectation for your meeting with Ken Lay?

Watkins: Unlike Jeff Skilling, who had abandoned ship, my view was that Ken Lay was an honorable, ethical man. I thought when I told him his ship had a fatal hole, he would check it out. If there was such a hole, he would try to save jobs and business lines, and he would form a crisis management team.

Ken Lay asked executives, as well as Vinson & Elkins, to relook at the plans to make sure we were unsinkable. But nobody went below deck to see if there was a hole. What I put in front of him was one basic question about the Raptor entities that owed Enron a lot of money. How were they going to fund the $500-700 million in losses? Was it from outside parties, from outside investors or creditors, or was it from Enron stock? If they are going to pay Enron back using Enron stock, I said, then we are done for.

If he had just tried to answer that question and truthfully engage another accounting firm about it, he would not have been able to escape the fact that Enron had committed accounting fraud. But he never looked at that question. He looked at whether I was bringing up anything new. He reassured me that the board knew about the Raptors, that Arthur Andersen had looked at the Raptors. It was bizarre. The CEO has to have pristine ethics, because if there is any erosion in values at the top, it gets magnified in the trenches.

I am often asked what I would do differently. The answer takes me back to 1996. The fair-value stuff I saw in 1996 was the beginning of the fraud, and I should have made an even bigger deal about it back then. But I also should have paid more careful attention to Ken Lay’s reaction to me in 2001. If he was really looking into this, I would have had more meetings with Vinson & Elkins. I would have had a meeting with the general counsel at Enron, who never once called to meet with me.

Response from Others

Near the end, when it became apparent that you were making some waves, what was the reaction of your peers?

Watkins: Actually, not many people knew of my meeting with Ken Lay or that I was bringing up accounting fraud concerns until Congress leaked my memos to the press in January of 2002, well after the bankruptcy.

As I was planning to meet with Ken Lay in August of 2001, in that five-day period between the all-employee meeting and my scheduled appointment with Ken Lay, no one really knew what I was doing unless I told them, or made inquiries. During that five-day window of preparation work for me, certain employees in the finance, control and risk and accounting departments were very willing to feed me information. I think employees want to work for an ethical company. They saw things that bothered them and did not like it, so people were very willing to get me some spreadsheets, presentations, data, etc.

In hindsight, I also wish that some of my peers had gone with me to meet with Ken Lay. Jordan Mintz was an in-house lawyer who was very concerned about this. I did not know that he had already taken these things to another law firm, and they had said they are very problematic. I did not know that Vince Kaminski had protested these things. So if I had just Vince and Jordan with me, the outcome might have been different.

But the company went bankrupt and no one really knew about my role until Congress leaked my memos in mid January 2002. Within a couple of days The New York Times was printing the whole thing. I was inundated with a huge flood of support. People were concerned that the top executives would get away with it, and all the blame would go to Andy Fastow. It was not all Andy, but at this point, the executives had circled the wagons and said, “There is your crook, it is Andy Fastow.”

The CEO has to have pristine ethics, because if there is any erosion in values at the top, it gets magnified in the trenches.

Many employees knew that if their department had an earnings hole the business heads went to Andy to fill it. Filling earnings holes with business done with your CFO and one of his funny structures made employees uncomfortable to say the least. The business unit heads, like all of us, were getting stock options that, over time, were quite lucrative. Many had done quite well for themselves. I believe over $1 billion of stock and stock options had been cashed out by Enron executives and board members within the last one – two years of the company’s existence. If the whole mess could be blamed on Andy Fastow, the crooked CFO, then it was almost the perfect crime with Andy as the fall guy. They all could have gone home rich with $30 million to $100 million in the bank and Andy sitting in prison for life.


What advice would you give someone else in a position similar to yours?

Watkins: I tell college students, “If your values are being challenged, get out, because you cannot change an unethical corporation unless you are at the very top. Pay attention to rationalizations.” The famous rationalization at Enron was, “What do we have accounting rules in this country for, if you do not use them.”

There is a story in The Smartest Guys in the Room that is perfect for describing how Enron was misusing accounting rules. They interviewed an accounting executive, unnamed, and he described how Enron rationalized nearly $15 billion off balance-sheet debt that had been recorded as asset sales rather than debt. The accounting rules are very specific for collateralized mortgage obligations for transferring risks, for rules when companies move assets into a special purpose vehicle and in effect sell the risk to a bank or an insurance company or an institution, and they are able to treat that as an asset sale. The analogy for Enron’s use of these rules goes like this: Let’s call the asset sale treatment a duck.

Outrageous pay, where CEOs have put themselves first ahead of the organization, has not received the same kind of moral outrage (as safety and environmental problems).

What Enron has is a dog, which is debt, but Enron wanted the duck treatment. So they looked through the accounting rules, which are very, very specific, and they describe what it takes to be a duck. You must have a white feathery back, orange webbed feet, and a yellow bill. So Enron takes its dog, glues white feathers all over its back, puts some orange plastic rubber feet on its little paws, straps a yellow bill to its nose and tells Arthur Andersen, “You tell me I do not have a duck. I meet all the conditions of a duck and I have a duck and I am going to treat this thing as a duck,” and they are very forceful about it. They used rules in ways they were never meant to be used.

I counsel people, don’t accept rules over principles. You know what the underlying principles are. If someone is in the unfortunate position where I was, I say don’t go it alone. I should have found a few more people to go with me because then they could not have dismissed me as one lone person.

What makes this country great is the system of checks and balances, and you need that system of checks and balances to work. You should not have to rely on individuals to have to jump in front of a train to stop something bad from happening. My warnings did not stop anything bad from happening. They were too little, too late. Enron is dead, Arthur Andersen is dead. Thousands of employees and shareholders are wiped out. The public accounting that Arthur Andersen should have been doing failed, the legal work that Vinson & Elkins was doing failed. The debt lending practices of the big banks failed.

It worries me that we are in this big climate of push back, where people are pushing against regulations, including the Sarbanes Oxley Act. Hank Paulson has a committee that includes John Thornton and others who are trying to limit the accountability and the liability of CEOs. We are repeating a pattern but we are not handling it correctly, and I really think we are at a crossroads, and we may choose the wrong path.

If your values are being challenged, get out, because you cannot change an unethical corporation unless you are at the very top.

When I was a young auditor, all the worker safety and environmental regulations were put in place. Companies were really balking, saying that this is going to drive business overseas, we cannot compete if we have to live up to these environmental pollution standards or these worker-safety standards. But the country held firm. There was moral outrage that workers were losing their eyes or their limbs or their fingers or put in cancer-inducing situations. You can do business in a way that does not pollute the environment, and does not put workers in harm’s way. We lived through those regulations and found a way, and our capitalist system works better for it.

Now they are pushing back on this accountability, and if you really look at the Sarbanes Oxley Act, it does nothing more than codify best practices. It does make it easier for CEOs to go to prison, but only for producing manipulated, misleading financial statements. They should not be doing that anyway. They should not even have a risk of doing that. It protects whistleblowers. It has independent directors meeting without management present. Things that were best practices, but the companies weren’t doing them.

You don’t need bulletproof internal controls; you need a zero-tolerance policy for ethically challenged employees. Internal controls should not prevent every fraud from happening because that would be too costly and would not make sense. An internal-control system should be robust enough that it identifies ethically challenged employees so you can fire them. Unfortunately, leaders will fire an ethically challenged employee who is a dud. But if an ethically challenged employee is good with customers or generates a lot of earnings, they give that person a second chance. Citigroup is a prime example. They gave just a reprimand to those London traders who manipulated the Euro bond market. They did fire some folks over their Japanese private-banking snafu. But when you give ethically challenged employees a second chance, they just tend to go into a stealth mode and figure out an even sneakier way to get to their ends.

I worry that we do not have enough moral outrage about the accountability problems. It will be the country’s downfall if we do not hold leaders accountable.

As I have read about the Enron case, Skilling, Fastow, and others seemed to be actively engaged in fraud, while Ken Lay kept trying to distance himself. He was not actively doing the wrong, but he was also not playing his leadership role. Is that accurate?

Watkins: Mostly. The story of the emperor’s new clothing is an awfully good analogy to explain Ken Lay. In that fable, you have the swindlers, and I consider them to be Skilling and Fastow. But Ken Lay, the emperor, is focused on his appearance, very vain, always looking for the next set of fancy clothes and he does not pay attention to his kingdom at all. He was focused on the outward appearance of Enron, never involved in the details.

In that fable when the little boy says, “He is naked,” the emperor does feel the chill in the air and realizes that if he had clothes, he would not feel so cold. But he holds his head up high and keeps marching down the parade ground, because what is he to do? He is the emperor. I think Ken Lay got stuck in a moment in time when he could have addressed the problem, or just kept marching. He chose to keep marching, but for him, that choice violated securities laws. His continuation down the parade route (so to speak), meant his continued touting of the Enron stock with statements like, “Now is a good time to buy Enron stock.” Or, “We have the utmost faith in our CFO, Andy Fastow.” Or “There are no accounting irregularities.” All the statements he made turned out to be violations of security laws because he was telling investors to stick with it or buy more.

What was it like to testify at the trials?

Watkins: The Congressional testimonies were very tough, high-pressure situations. In 2002, I testified for nearly five hours by myself in front of the House and for the same amount of time with Skilling in front of the Senate. Both situations were difficult, but I had thought it would be more so with Skilling sitting next to me in front of the Senate. But in the end, the senators were grilling him so hard that I could just kind of sit back and watch. I also testified at Ken Lay’s trial this past spring of 2006. That was an eerie experience. Ken Lay looked like he just found out his dog got run over by a car. He just looked sick to his stomach for the most part. But Skilling, who was also on trial with Lay…I came to appreciate how hard it must be to be a Mafia witness, with the Don sitting there giving you that mean eye. It was unnerving. It is hard to be a witness because you are making eye contact with the person you are talking about.

What was your reaction to the news of Ken Lay’s death?

Watkins: I was sad. It’s very tragic. You wonder about all the pressures and whether that put him in an early grave. I was away on vacation, so I am glad I missed all the hoopla, but when I came back I was surprised at the outrage about it. People were really mad that he escaped justice. I kept wondering, “What do you mean escaped justice? He’s dead.” But a doctor who had been a victim of financial manipulations explained it to me. He said, “I just wanted to see Ken Lay in prison, I wanted to see that interview a decade later when some reporter went to the prison and interviewed him, because I wanted it to be a lesson for every CEO that they need to produce honest financial statements. Guys die all the time at 64, there is no lesson in that.” That’s a sad reaction.

I counsel people, don’t accept rules over principles.

What about lessons from Jeff Skilling?

Watkins: His prison sentence of 24 years is a long time. It will be a lesson. But at CEO conferences I have found that CEOs never see themselves as Skilling. They do relate to Ken Lay, but they never see themselves in Skilling’s shoes. I have always thought a McKinsey consultant should never be CEO.

A lot of other companies have had similar types of scandals: Tyco, Andersen, ImClone. Have you talked with anyone involved with those organizations? Do you see similarities or differences between some of the other major corporate scandals and what happened to Enron?

Watkins: Enron represents a more systemic failure because it involved the bankers, the auditors, the lawyers, all of those hundreds of internal accountants, lawyers, finance prof-essionals, and executives. Even Enron’s board of directors waived the code of conduct twice. It involves universities touting Enron; Darden and Harvard did case studies on Enron as a model company. Business Week, Fortune, and Forbes, all lauded the company. Wall Street analysts loved them. Most of the research analysts had Enron ranked a strong buy in October 2001, even after Skilling had left.

If you really looked at the financials, there were some glaring problems with Enron’s cash flow, so glaring that the people should have seen them. When I was doing my book, I looked at Enron’s press releases and then dissected the 10Qs. Skilling told the research analysts that Enron Energy Services had turned the corner. We had signed this contract and that contract, and business was looking great. But the 10Q would show all the income coming from just the pipelines or from other businesses. The 10Q did not match what he told them, but they had done their earnings reports and didn’t pay attention.

Andersen was doing faulty audits for short-term gain. Vinson & Elkins were doing shoddy legal work. But it also took those banks loaning money to Enron, knowing it was debt on their books, but revenues on Enron’s. Citigroup and Chase both settled the Enron shareholder litigation for $2 billion apiece. When Enron declared bankruptcy their long-term debt was $13 billion on its balance sheet. When they met with their creditors in December 2001, they announced the real long-term debt number of $38 billion. I would say at least $10 to $12 billion of the $25 billion of off balance-sheet debt was legitimate, debt that was tied to an international power plant or pipeline and had no recourse to Enron. But the other $12 to $15 billion was this funny stuff that CIBC did, that Citigroup did and Chase did, off balance-sheet debt that had claw-backs to Enron Corp.

You need that system of checks and balances to work. You should not have to rely on individuals to have to jump in front of a train to stop something bad from happening.

WorldCom has the faulty research, where the Citigroup research analyst, Jack Grubman, was really pushing that stock. But for the most part, their fraud was six people from the CFO’s office who moved a really big number from the income statement to the balance sheet. You have some faulty behavior from Arthur Andersen. When Cynthia Cooper, in her role as internal auditor, first discovered problems, she called the Arthur Anderson partner on the WorldCom account about it and he replied that he only talks to Scott Sullivan, the CFO of WorldCom. That is wrong. When your internal audit head says, “I think I have a problem,” he should be meeting with her. So you have the faulty audit, but their board did the right stuff. She was able to go to the head of the audit committee and they got rid of the bad seeds so to speak, and they did the right thing.

Tyco was asleep at the switchboard, so that has the board elements to it. The Adelphia board was not keeping a good rein on what the founders of the company were doing.

They can all be summed up by greed and arrogance and thinking you can get away with it. It is just that the Enron case covers it all. I had an MBA professor say, “We can make a whole semester course out of Enron. The others, we can just cover in a week or two.”

Lessons Learned

What are the bigger lessons for corporations coming out of Enron?

Watkins: Capitalism requires morality and a long-term view. This has broadly broken down. For an Enron trader to be so predatory that they bankrupt their major customers in California and nearly bankrupt the state, seems to be shortsighted and stupid because in the long run you don’t have a good business when you have bankrupted your significant customers. But the money schemes and the pay schemes have gotten so far out of whack in this country that the long-term view is no longer important. If you can pump up the stock price, the energy traders could get $5 to $8 million dollar bonuses in one year. One of them is running his own multi-billion dollar hedge fund today. They didn’t need to look out for Enron’s long-term interests, because they can make enough to go home rich and start their own businesses.

What came out in The Smartest Guys in the Room, was what Andy Fastow was doing. If a banker was going to decline some business with Enron, he would sweeten it with the promise of some investment banking business coming up. “If you can just to do this one debt deal, you will move to the top on the list for the next IB deal.” The bankers did not care about the long-term health of their banks, because they were making multimillion-dollar bonuses. They are now working for a hedge fund, living in the Hamptons. You do not have to have a career and work for two decades at a company to get legacy wealth anymore. You can do it pretty quickly and through funny stuff, which tears the fabric of the capitalist system apart. Even below the top tier there were problems. Several senior officials avoided indictments either by cutting deals in advance or simply by hiding in the shadows of other more prominent targets. These officials were not ethical; they were at the second tier of leadership and did the wrong thing. When the ethically challenged person, not just the outright crook, is promoted, it hurts the system.

The Future?

Are you hopeful, now that Enron has been put away, that everything is good for American business?

Watkins: Unfortunately, no. When the Enron story first broke in its full bloom around January 2002, E.J. Dionne from the Washington Post wrote an op-ed piece about Enron. He quoted James Madison, one of the founders of our country. Madison said that if men were angels no government would be necessary, but men aren’t angels so we do need government. E.J. Dionne concluded that if capitalists were angels, we could deregulate everything, but obviously capitalists aren’t angels.

We have had a paradigm shift and have lost some of the checks and balances of the system. I think shareholders and management used to be more connected. Up until the ’80s, when I was still a public auditor, the companies I audited would get geared up for big shareholder meetings. 1,000 to 5,000 shareholders were going to show up, and there was always a sort of a buzz about one or two areas. They stayed honest because they knew of certain shareholders that read everything they ever produced, and these shareholders always got in their face. In the ’90s, everybody moved to mutual funds. No one invests in individual companies anymore. When your mutual fund isn’t rising like your next door neighbor’s, you switch. The money managers know that so they focus on the stock prices. Even the best of the best, like Vanguard, admit to rubber stamping nine out of 10 proxy statements. They get so many, they just go with management. We have lost a significant check and balance on management.

You can see that in the pay scale. In 1970, CEOs on average made 26 times more than the average worker. In 1980, it was 42 times. By 1990, it was 85 times. That is still somewhat reasonable, because in the ’90s everyone moved to mutual funds and no one was really looking at proxy statements anymore but CEOs and benchmarking companies. By the year 2000, average CEO pay was 531 times above the average worker. No country in the world is even close. Great Britain is at 45. Canada is at 20. Brazil even is at 51. Japan is at 10.

Now the people like the National Association of Corporate Directors say that is a problem. The Blue Ribbon Commission at the Corporate Conference Board says that is a problem. Paul Volcker says we should do away with stock options and stock grants. CEOs should be just paid cash. The experts say this is a problem, yet nothing is happening. Pay just keeps going up. So I think it highlights that the board system in this country does not work; that we need a system that mirrors what the Europeans do, where the chairman is truly a separate role. It is never the retired CEO but a separate outside strong businessperson. Germany has an advisory board and a management board and at least the advisory board gives backbone to the management board.

I often quote Michael Novak, who wrote The Spirit of Democratic Capitalism. He said that the capital system is a three-legged stool sitting on political freedom, economic freedom, and moral responsibility. Weakness in any one of the legs and the stool topples. The moral responsibility leg has had weaknesses in the past with child- labor abuse, workers’ safety, and environmental pollution, and we now have laws that addressed those areas. I think it is because society had moral outrage about child labor, workers’ safety, and environmental pollution.

This current problem is one of entitlement. Outrageous pay, where CEOs have put themselves first ahead of the organization, has not received the same kind of moral outrage. Unfortunately as a society, our first feeling is envy that the CEO has so much money. Then we are morally outraged. So we are not really getting behind any kind of movement because we are still thinking, “One day I am going to be like that CEO.” There is no one to point to the worker that died of cancer or lost a limb or that Lake Erie is on fire. But it is eroding the capitalist system. It is one of these things that we will look back at in a couple of decades and identify the point of no return, where we took the wrong path.

Future Leaders?

Are you hopeful about the next generation of leaders?

Watkins: Not right now. I sense from my interactions that they don’t want the rules to change in the next decade, because they see the riches today’s leaders have received, and they want them.

Personal Next Steps

Beenen: Will you tell us briefly what you are doing now?

Watkins: I am still on the lecture circuit. Enron represents such a perfect storm of problems that I am still in demand for speaking and telling about it. But then also I am working with some executive coaching firms, to develop a nine-month-long leadership development program. It is designed along industry lines, 25 to a class, focusing on the next generation of leaders. These are knocking on the door of the CEO suite, developing their leadership skills, their fortitude, their courage, but also a peer network, so that they have peers within their industry that they feel comfortable bouncing things off when things seem off kilter. I want to be a part of changing the course of business.