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Good corporate governance should put in place measures that eliminate or at least reduce the cancerous principal- agent problem inorder to guarantee the accountability of certain individuals in public companies. Coyle (2003, 6) says "In recent years, the recognition of need for changes in the way that public companies are governed began with a number of spectacular and well publicized corporate failures." One of these spectacular and well publicized failures includes the Enron case. According to Coyle (2003, 8), good corporate governance in developing countries is essential for attracting foreign investment capital. Zimbabwe, as a developing country, can draw a number of lessons from the Enron issue inorder to prevent history in the form of another "Enron" from repeating itself within its borders. This will scare away the much needed foreign investors from the country.
Background of the Enron Issue
Enron Corporation was an American energy company based in Houston, Texas and was formed in 1985 when Houston Natural Gas merged with Internorth. The company's initial focus was the regulated transportation of natural gas. After some years of expansion on domestic and international front, Enron's focus had changed and it was involved in a number of complicated deals involving natural gas, pulp and paper, communications companies and many more. Full details of how the company was making money was unclear to analysts and the general public and became a closely guarded secret. The Fortune Magazine reported that "But describing what Enron does isn't easy, because what it does is mind-numbingly complex" ('Is Enron Overpriced?', March 2001 ).
Before its collapse, Enron 'success' was a much talked about subject. A report on BBC News website reported that "From 1996 to 2001, Fortune Magazine named Enron as America's Most Innovative Company. As a result, in just 15 years it grew from nowhere to become America's seventh largest company, employing 21,000 staff in more than 40 countries" and that "Fortune magazine named Enron "America's Most Innovative Company" for six consecutive years from 1996 to 2001. " ('Enron Case', July 2006).
After its collapse, there was enough evidence that Enron's actual innovativeness was centered on 'doctoring' of financial reports to make the company more attractive to investors. Enron was not being truthful about its financial status and business dealings in clear case of lack of transparency. Coyle (2003:22) says "Transparency refers to both information about the financial position of the company and to non financial issues such as the direction the company is taking, its strategic objectives, and so on. A transparent company is, therefore, one that investors can understand." Thus it can be safely concluded that Enron was not a transparent company and so its collapse took many people including shareholders by surprise.
BBC News summarized the devastating effects of Enron's collapse when it reported that "â€¦ Enron left behind $31.8bn (£18bn) of debts, its shares become worthless, and 21,000 workers around the world lost their jobs." A developing economy such as Zimbabwe cannot afford a scandal of such magnitude and should take lessons from the Enron case.
Lessons from the Enron Case
Company Executives' investments in the company require monitoring and insider trading should be a punishable offence.
Just before Enron collapsed, the company's executives used their insider knowledge and sold their shares, making massive profits in the process, just before the company's problems were made public (BBC News 'Enron Case', July 2006). Such a practice is known as insider trading whereby persons with access to non-public company information use their privileged status to trade in the company's stock.
Monitoring company executives' activities in as far as unusually massive acquisition or disposal of company stocks could have sounded early alarm bells about Enron's financially status. The lesson learnt is that mechanisms should be put in place to discourage insider trading and, in particular, information about company executives who make heavy investments or divestments should be made public and such moves should go through an approval process which first ascertains nothing untoward is going on in the company.
In Zimbabwe there was no legislation for dealing with insider trading in the country's statutes. In 2004, the Zimbabwe Independent pointed out that "Insider trading on the ZSE currently cannot be proven because the country does not have laws stipulating what it is and how it can be stopped." (Zimbabwe insider trading set to worsen', April 2004). Perpetrators are well aware of the deficiencies of legislature and can carry out insider trading at will.
However Zimbabwe seems to have taken a leaf out of the Enron issue when the Securities Act which was promulgated in 2004, was made operational in 2008. Sections 90 and 91 of the Securities Act ensure that misuse of inside information makes perpetrators criminally and civilly liable respectively. In addition, there should be mechanisms to monitor company executives' investments in the organization.
There should be separation auditing from consulting functions
Arthur Andersen was hired to do both auditing and consultation for Enron. This was a clear case of conflict of interest. Responding to reports that Enron had paid Andersen $25 million for its audit and $27 million for consulting and other services, industry analyst Arthur Bowmen questioned how an auditor could be independent when a client was paying such huge sums of money (Time, 'Enron: Who is accountable?', January 2002).
To make matters worse Enron hired former Arthur Andersen employees. This created an ethical conflict of interest as it would be easy for former colleagues to criminally collude. Coyle (2003:117) says "The purpose of the audit report is to give users of a company's financial statements some reassurance that the information in the statements is believable. Users of accounts want reassurance that there has not been any fraud or error." However due to the conflict of interest alluded to earlier, it was not surprising, therefore, that the auditors reported irregularities in Enron's financials. In fact, Arthur Anderson was reported to have ordered destruction of audit documents relating to work carried out at Enron thereby obliterating evidence and confirming that the independence and integrity of auditing done for Enron was doubtful.
From the Enron issue, Zimbabwe should learn that separation of audit and consulting services is vital inorder to protect the interests of investors. It should also be put in legislation that accounting firms who destroy documents to circumvent investigations should face severe penalties.
There should be no conflict of interest among the company's employees
One problem that was rampant in the Enron issue was the principal-agent problem. Coyle (2003:11) points out that "In the absence of the protections that good governance supplies, asymmetries of information and difficulties of monitoring mean that capital providers who lack control over the corporation will find it risky and costly to protect themselves from the opportunistic behavior of managers and controlling shareholders." There is ample evidence that company executives in Enron were forming partnerships to siphon money out Enron. BBC News reported that "Some of the partnerships were set up by the company's executives, benefiting them, their families and friends to the tune of millions of dollars." ('Enron Case', July 2006).
In Zimbabwe, there were warning signs that conflicts of interest could prevalent in our organizations. One case that comes to mind is the Econet - Old Mutual case where directors were seeking shareholder approval to enter into an installment sale agreement with Econet Wireless Global (EWG) based in South Africa. The Financial Gazette reported that "Nyambirai was questioned over his involvement as lead financial advisor to the proposed transaction as well as legal advisor, while he was also board chairman of the company.
Nyambirai is a principal shareholder and partner in diversified financial services group, TN Financial Holdings, the financial advisor to the transaction, as well as Mtetwa & Nyambirai, the legal advisor." ('Econet fights bid to block share deal', April 2009)
Clearly, there is a need to monitor partnerships that are formed with external entities in order to curtail this kind of practice. Company executives should be bound by the code of ethics to ensure that they do not abuse their powers in pursuit personal enrichment.
Encouraging and promoting an atmosphere conducive for whistleblowers in the organization
Coyle (2003:30) defines a whistleblower as "An individual, usually an employee, who reports concerns about misconduct or misdemeanors by someone in the organization. A whistleblower does not use normal lines of reporting, but instead goes to a senior individual within the organization or to someone outside the organization, such as the press or regulatory board." One employee, Sherron Watkins, blew the whistle directly to the Enron CEO about irregularities in the company financials but the CEO did not pay heed to the information until it was too late.
Zimbabwean companies should respect the role of whistleblowers as people who provide vital information that contribute to the survival of the organization in the face of internal corruption. Whistleblowers should be protected and the information from they provide should trigger prompt investigations to avoid collapse such as the one suffered by Enron.
Maintenance of credible financial accounting standards
The need for credible accounting standards requires no reiteration. In a clear case of market manipulation, financial statements at Enron were heavily manipulated to paint a rosy picture about the company's financial health. "Enron engaged in off-balance-sheet financing, using subsidiaries that it controlled to hedge its own investments. On the books, this practice inflated company profits and reduced debt" (Source: http://www.es.northropgrumman.com /ourvalues/articles/assets/Circuit092002). According to Coyle (2003:12) "Accounting irregularities in a number of companies led to tightening of accounting standards, although problems of window dressing are unlikely to ever disappear completely."
Zimbabwean organizations should learn from the Enron that case that financial misrepresentation is costly and the use of good accounting standards is of paramount importance in business and any reports of financial misrepresentation will scare away investors.
Be wary of overnight successes
The rise and rise of Enron in a small amount of time should serve as lesson to investors in Zimbabwe and elsewhere to be careful of companies that make big monies with fuzzy business models and plans. Investors should ensure that they understand how the companies they invest in get their profits. In 2001, shortly before Enron collapsed, Fortune Magazine commented that "As for the details about how it makes money, Enron says that's proprietary information, sort of like Coca-Cola's secret formula. Fastow, who points out that Enron has 1,217 trading "books" for different commodities, says, "We don't want anyone to know what's on those books. We don't want to tell anyone where we're making money."" ('Is Enron Overpriced?', March 2001 ).
The lessons learnt from the Enron case have a strong bearing on the virtues of adopting and adhering to good governance. The company's board of directors should play an active role to oversee corporate management so that it protects the interests of shareholders. Developing economies such as Zimbabwe should learn from the Enron issue if they are to attract foreign investment capital.
The Enron's board did not pay heed to conflict of interest rules and allowed the company to create private partnerships to do business with the firm. The sole purpose of these partnerships was to conceal debts and liabilities so that Enron's reported profits would be inflated and as a result, the company collapsed unexpectedly in the end robbing shareholders of their hard earned cash.
Clear separation between audit and consultancy functions should prevail in organisations to prevent detrimental conflict of interests such as in the Andersen case. Audits are there to reassure the integrity of financial statements if and only if the audit team is independent.
Companies should not ignore the concerns of whistleblowers as was the case in the Enron issue. Measures to protect whistleblowers should be put in place to avoid persecution or fear of persecution since the information proffered by whistleblowers can make a great difference with regards to whether the company will keep on thriving or it collapses. Finally, mechanisms to prevent insider trading should be regularly reviewed to protect shareholder's interests.