enron corporate control presented by: cary cheung, christie cheung, rita chung, ryan chan d1: what...
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Enron
Corporate Control
Presented by: Cary Cheung, Christie Cheung, Rita Chung, Ryan Chan
D1: What has the Enron case showed about the problems of corporate
control?
Presenters:Cary CheungChristie CheungRita ChungRyan Chan
Date: Sept 30, 2002
Managerial Economics – Professor Howard DAVIES
Enron
Corporate Control
Presented by: Cary Cheung, Christie Cheung, Rita Chung, Ryan Chan
Outline
• Introduction to Corporate Control• Background of Enron Corporation• The Story of Bankruptcy• Reasons for Bankruptcy• Problems of Corporate Control • Reforms• Conclusion
Enron
Corporate Control
Presented by: Cary Cheung, Christie Cheung, Rita Chung, Ryan Chan
Nominal Corporate Structure
Senior Manager
Board of Director
CompanyStaff
ShareholdersShareholders AuditCommittee
Auditor
ExecutiveDirectors
Non-ExecutiveDirectors
Enron
Corporate Control
Presented by: Cary Cheung, Christie Cheung, Rita Chung, Ryan Chan
Ownership VS Control?
Shareholders SeniorManager
Senior managers seek for max profit?Looking for significant discretion?Is there any Control mechanism?
Enron
Corporate Control
Presented by: Cary Cheung, Christie Cheung, Rita Chung, Ryan Chan
Importance of Corporate Control
• Market Corporate Control is the market for voting shares, which give ultimate control
• value of a firm’s stock = value of the stream of future profits
Market Corporate Control should prevent managers from being lazy or pursuing objectives other than maximizing the organization’s profit
Important and powerful mechanisms
Enron
Corporate Control
Presented by: Cary Cheung, Christie Cheung, Rita Chung, Ryan Chan
Rise and Fall of an Energy Giant
Let’s see Enron case…
Enron
Corporate Control
Presented by: Cary Cheung, Christie Cheung, Rita Chung, Ryan Chan
Shareholders Structure Types
Family-ControlledSingle Shareholder hold >20%e.g Cheung Kong Holding Ltd.
managed by major shareholders
Management-ControlledNo Single shareholder hold >20%e.g. Enronmanaged by professional managers
Other shareholders:
Institutions
Corporations
Pension funds
Charities
foundations
Small individual
investors
Enron
Corporate Control
Presented by: Cary Cheung, Christie Cheung, Rita Chung, Ryan Chan
Background of Enron Corporation (1)
• Houston-based energy trading and distribution company
• Famous for advocacy of energy deregulation• In just 15 years, climb to be 7th largest
company in US (Fortune 500, 2000), with 21,000 staff
• 16th largest in the world• In 2000, stock has crested at $90 a share• Market capitalization: $80 billion• Revenue $139 billion
Enron
Corporate Control
Presented by: Cary Cheung, Christie Cheung, Rita Chung, Ryan Chan
Background of Enron Corporation (2)
• Arthur Andersen acts as accountant and consultant
• Board of director– 14 members, only 2 insiders– Most of the directors owned stock
• Employee stock ownership and retirement planning– Incentive purpose– Enhance company profit
Enron
Corporate Control
Presented by: Cary Cheung, Christie Cheung, Rita Chung, Ryan Chan
Enron’s Bankruptcy (1)
Enron announced a large loss in its quarter statement
• 3rd qtr loss of >$600 million (surprised Wall Street)
• Stock price fall from the mid-$30s to the low-
$20s (triggered a crisis of confidence in the company)
Overstated its profits by ~16%
Jul
Oct
Nov
Dec ………Bankruptcy
2001
< Year 2001Prosperous business performance…..
Enron
Corporate Control
Presented by: Cary Cheung, Christie Cheung, Rita Chung, Ryan Chan
Enron’s Bankruptcy (2)
Major reason of bankruptcy?
A substantial fraction of Enron’s reported profits over a 4
year period (1996-2000) had been the result of
accounting manipulations
--- investigation by special committee of the Enron board
Reported profit Actual profit
Enron
Corporate Control
Presented by: Cary Cheung, Christie Cheung, Rita Chung, Ryan Chan
Reason For Bankruptcy (1)
• Accounting gimmickry:– Unable to spot bad accounting practices and company’s
overstatement of profits
• Conflict of auditor:– The multiple conflicting roles of auditor– Automatic renewal of auditing contractsAffecting the independence of auditor
• Accounting and staff policy failure– Although a professor of accounting and a dean for
monitoring the company, but they all fail in their profession
– Disastrous loss in employees’ retirement fund, but the ex-CEO has cashed his own stock much earlier?
Source:Enron Posts Surprise 3rd Quarter Loss After Investment, Asset Write-Downs, Wall St. J, Oct 17, 2001
Enron
Corporate Control
Presented by: Cary Cheung, Christie Cheung, Rita Chung, Ryan Chan
Reason For Bankruptcy (2)
• Political confusion:– Ironical relationship between governmental
monitoring parties and political parties
Source: www.cnn.com / www.businessweek.com
Enron
Corporate Control
Presented by: Cary Cheung, Christie Cheung, Rita Chung, Ryan Chan
Reason For Bankruptcy (3)
• Managerialism– Managers tend to build up their own empires and
scarify the profits/benefits of the organization
• Conflict of the board– Enron’s board of directors fail to control and oversee
the management– The board had been benefited in various relationship
with the companyLack of independence of the board
Source:Professor of international business and strategic management at Suffolk University, Boston, US
Enron
Corporate Control
Presented by: Cary Cheung, Christie Cheung, Rita Chung, Ryan Chan
What’s Wrong with it?
How can they be fixed?
Enron
Corporate Control
Presented by: Cary Cheung, Christie Cheung, Rita Chung, Ryan Chan
Problems of Corporate Control (1)
Stock Option Scheme
•CEOs, Managers and employees are given STOCK OPTIONS as their compensation package
•Their aim is to get a maximum reporting profit so as to boost the stock price of the company
Enron
Corporate Control
Presented by: Cary Cheung, Christie Cheung, Rita Chung, Ryan Chan
Problems of Corporate Control (2)
• Board members and corporate partnerships were not independent
• Allowing private partnerships (set up by employee) to be valid Enron investment
• Board members could be benefited in various relationship
Control and Management Overlapping
Enron
Corporate Control
Presented by: Cary Cheung, Christie Cheung, Rita Chung, Ryan Chan
Problems of Corporate Control (3)
• CFO badly perform his role
• The financial report was very complicated to be understood
• A special team of reviewing the reports fails to perform their role
Failure in Financial management
Enron
Corporate Control
Presented by: Cary Cheung, Christie Cheung, Rita Chung, Ryan Chan
Problems of Corporate Control (4)
• Over 50% of Enron’s employee retirement schemes’ asset are invested in Enron’s share
• All employee have a common goal to boost the stock price of the company
Employee Retirement Schemes
Enron
Corporate Control
Presented by: Cary Cheung, Christie Cheung, Rita Chung, Ryan Chan
Reform (1)
Monitoring
• The selection of Qualified CEO to monitor the work of senior staff
• An independent committee of external board of directors to work with the company’s auditors
• Auditors should not be allowed to perform other services that may compromise their independence
• Management’s compensation should be a flat rate
Enron
Corporate Control
Presented by: Cary Cheung, Christie Cheung, Rita Chung, Ryan Chan
Reform (2)
Corporate governance regulation
• Government and Stock Exchanges should tighten regulations and rules to avoid any insider-trading
• Limitation of percentage of assets of retirement funds which can be invested in their own company.
Enron
Corporate Control
Presented by: Cary Cheung, Christie Cheung, Rita Chung, Ryan Chan
Reform (3)
A good Financial reporting system
• The financial report should not be too complicated (like Enron)
• It is dangerous that the report was only understood by only one or two people
• Reports should be made to a “easy-to-read” and easy to be understood by shareholders
Enron
Corporate Control
Presented by: Cary Cheung, Christie Cheung, Rita Chung, Ryan Chan
Conclusion
Enron challenges some of the core beliefs and practices that have underpinned the
academic analysis of corporate law and governance
we rely on assumptions of the efficacy of corporate governance/control in monitoring
managerial performance
Enron
Corporate Control
Presented by: Cary Cheung, Christie Cheung, Rita Chung, Ryan Chan
THANK YOU
END of D1 Group’s Presentation
Enron
Corporate Control
Presented by: Cary Cheung, Christie Cheung, Rita Chung, Ryan Chan
Appendix
1. Execution of nominal corporate control2. Enron’s Governance Structure
Enron
Corporate Control
Presented by: Cary Cheung, Christie Cheung, Rita Chung, Ryan Chan
How is the Corporate control executed?
• Non-Executive directors – independent view to strategy performance,
resources and standards of conduct• Executive directors
– business decision makers • Shareholders
– voting rights – layoff/appoint any Board of Director who is beneficial
to the company such that the future profit will reflect on stock price
• Audit Committee – consists of non-ex director and Financial Director
(without voting rights) – assurance of independence between Director and
Auditors
Enron’s Governance Structure
BoardKen Lay: Chair; Co-chair ZZZ
Audit, Compensation Cees.
ManagementLay, Skilling: CEO
Fastow, CFO; KoppersCausey, CAO; Buy, CRO
Watkins; Kaminsky; McMahon
Company Policies
Code of Conduct
Internal Audit ?
Whistleblowers ?
AuditorArthur
Andersen
Outside Law Firm
Consultant: Arthur Andersen
MissingSuspended
Compliance
GuidanceFinan.
ReportsSPEs
© L. Brooks