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...illuminate meaning. This particularly true in relation to what the history books may call the 9/11 of CSR: Enron. In May 2006, a jury of eight women and four men in Houston, Texas, did what all of the regulators, investors, analysts, banks, boards, legal advisors and market checks and balances could not--concretely convict Enron's leaders of historic failures and human losses. Enron's emblematic emasculation embodied the turn-of-the-century corporation gone bad, and catapulted the field of CSR onto the popular culture radar of North America.
The stark trajectory of Enron stood out as the iconic embodiment and public face of all that CSR seeks to be the antidote to, despite competition from a veritable golden age of recent corporate scandals that have occurred primarily in the us:
* WorldCom (the biggest bankruptcy--$11 billion accounting fraud) (1)
* Global Crossing (the sixth largest bankruptcy in us history) (2)
* Adelphia ($2.3 billion in hidden debt) (3)
* Royal Ahold ($1.23 billion restatement and $1.1 billion settlement) (4)
* AIG ($2.3 billion restatement) (5)
* HealthSouth ($1.4 billion in false earnings) (6)
* Fannie Mae (Over $10 billion in accounting errors) (7)
Will the conviction of Ken Lay (who died in July 2006 around three months before his sentencing to a likely 30 years in jail)--former chairman and founder, on six counts including conspiracy, wire fraud and securities fraud and four counts in a separate bank-fraud trial--as well as Jeffrey Skilling--former CEO, on 18 counts of conspiracy and fraud and one (of 10) counts of insider trading (8)--make a difference? Will the convictions be a deterrent?
Ken Lay and Jeffrey Skilling were not the first corporate executives to be convicted, nor will they be the last. On the face of it, the collapse of Enron has not had much of an impact on executive compensation. However, perhaps a belated recognition by boards of their fiduciary responsibilities, and a surge in corporate governance shareholder resolution successes in the 2006 annual meeting proxy season, (9) will start to lessen a CEO's ability to run a company into the ground.
Five years after the introduction of the signature US reaction to loss of trust in the market--the Sarbanes-Oxley legislation to strengthen transparency, accountability and improved corporate governance--it remains unpopular with business in terms of its cost and the quality of auditing. Lingering implications of the reaction to Enron encompass potential mergers between stock exchanges in the us and abroad.
So, given the limits of regulatory and legal moves, does CSR have a role to play in avoiding future Enrons? We should remember that Enron had staff in charge of corporate responsibility. It issued a corporate responsibility report. It lied.
Investors in particular have an interest in spotting future Enrons, and as such could be key enforcers of better corporate governance. The new mainstream of CSR, typified by stakeholder dialogues and sustainability reporting, does not appear to be sufficient to empower these investors, given their reliance on self-declarations about corporate intentions and management systems, and audits from firms with a commercial interest in being regarded by their clients as both reasonable and affordable. Consequently, both responsible investors and the wider public face a credibility riddle of whom to believe when they make judgements on the social performance of companies. Three areas are important in solving this riddle: the type of information self-declared by companies, the type of auditors involved, and information gathered from other sources.
The first area where the information flow to investors could be improved is the production of more quantitative indicators of social and environmental performance rather than corporate intentions and management systems. Requirements could include guidelines for the production of basic quantitative indicators such as pollution records, average wages paid to different types of employee (including in the supply chain), non-compliance notices issued by law enforcement agencies, pending court cases, court rulings, out-of-court settlements, admonitions or investigations from intergovernmental bodies, recognised trade unions in the workplace, collective bargaining agreements, multi-enterprise codes endorsed, certifications received, political donations, memberships of trade associations, and payments to lobby groups. With such information, companies might be able to be indexed on the basis of their actual impacts on society rather than on the appearance of their management systems. The limited amount of information provided in this way raises questions not only of companies and their auditors, but of the ability of the stakeholders they engage with to move beyond issue identification for the materiality of non-financial reporting to the type of data required about those issues. Some of these performance indicators would be more difficult to compile and audit than others, with statistics on wage levels being much easier than mapping the often opaque and ad hoc nature of lobbying, or assessing its content. The usefulness of these performance indicators will still depend on the professionalism of the auditors. Initiatives such as the International Standard on Assurance Engagements (ISAE) 3000, developed by the International Auditing and...
NOTE: All illustrations and photos
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