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Tuesday, July 13, 2004

Ken Lay

Allan Murray, no Liberal he, thinks Ken Lay should go to jail.... - Political Capital:
Ken Lay should go to jail.

That isn't a legal judgment. The legal case against Mr. Lay isn't a slam dunk. Mr. Lay spent more time schmoozing with politicians and picking fabric swatches for his Gulfstream V corporate jet than studying special-purpose enterprises. As a result, his footprints inside the energy company are shallow, and his fingerprints few. Conviction will be difficult.

It also isn't a repudiation of the principle, plaintively repeated by Mr. Lay last Thursday, that "everybody should be innocent until proven guilty."

In the case of Enron, we already know a giant financial fraud lay at the heart of the enterprise. The convictions of former Chief Financial Officer Andrew Fastow and former Treasurer Ben Glisan established that. At stake in the Lay case isn't whether fraud was committed but whether the chief executive should be held responsible.

For the sake of American capitalism, he should.

The Enron scandal -- and those at WorldCom, Tyco, Adelphia and others -- exposed a glaring flaw in the oversight of America's top executives. At the time, three cures were suggested: the regulatory cure, the corporate-governance cure, and a third tonic, advocated by U.S. Federal Reserve Board Chairman Alan Greenspan and former Treasury Secretary Paul O'Neill, which might be called the "CEO responsibility" cure.

The regulatory cure was the first to be adopted, but is in many ways the least satisfactory. That is because the bad guys will always outrun even the most nimble of regulators, because regulations impose costs on the good guys and because regulations produce unintended consequences. I'm not yet ready to agree with those who grouse that Sarbanes-Oxley went too far. I do agree regulation is a clumsy, though sometimes necessary, solution.

And the crux:

The corporate-governance cure has more appeal, because it is an attempt to fix the system rather than regulate it. In the textbooks, capitalism works because corporate managers are kept in check by shareholders, who operate through directors they elect. The truth, however, is that many American directors are handpicked and handsomely compensated by the very executives they oversee. Giving shareholders more power over boards would seem a reasonable way to improve the system.

That was the goal of U.S. Securities and Exchange Commission Chairman William Donaldson when he made a very modest proposal last year. The proposal would have allowed shareholder groups to nominate their own directors, but only if a majority of shareholders had expressed disapproval of the board by withholding votes at the previous annual meeting.

The chief executives in the U.S. reacted as if their Gulfstreams had been grounded. Under heavy pressure from the Business Roundtable -- and from a White House eager to maintain good relations with big business during an election year -- Mr. Donaldson backed down.

That leaves the "CEO responsibility" cure. In unusually clear testimony in July 2002, Chairman Greenspan railed against the "infectious greed" that had invaded American business, arguing that the best antidote was strong and ethical CEOs. "It has been my experience on numerous corporate boards that CEOs who insist that their auditors render objective accounts get them," Mr. Greenspan said, "and CEOs who discourage corner-cutting by subordinates are rarely exposed to it."

In their book "The Smartest Guys in the Room," Bethany McLean and Peter Elkind tell a wonderful story about Mr. Lay speaking to his employees after the scandal broke. Referring to Mr. Fastow, Mr. Lay said: "I and the board are also sure that Andy has operated in the most ethical and appropriate manner possible." A written query submitted by an employee asked: "I would like to know if you are on crack. If so, that would explain a lot."

Mr. Lay on Thursday finally acknowledged that Mr. Fastow had "betrayed" his trust. (Mr. Lay's lawyer was more blunt, calling the former financial officer a "liar and a thief.") Mr. Lay added that "to the extent that I did not know what he was doing ... then indeed, I cannot take responsibility."
Democrats are silly to suggest that the indictment of "Kenny Boy," as President Bush called him, was delayed because of his political connections. But Mr. Lay is equally silly to suggest prosecutors were afraid not to indict him. This isn't about politics. It's about one of the largest financial frauds in American history. Ken Lay enjoyed the hundreds of millions of dollars he was paid for running Enron; now he should share in the penalties for looting it.


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