Wednesday, August 03, 2011

(update) WONDERFUL column on Enron's former directors.

See the Deal Professor's column in today's New York Times (here).

UPDATE (or why I shouldn't monitor my blog before 6:15 a.m.)--my buddy George posted a great comment, which I accidentally deleted, so here it is:
While I do not think all of the folks mentioned in the article are as pure as the driven snow, there is a thinly veiled assumption that they knew what was going on when bad things were happening and turned a blind eye. I think it is premature to indict them in the media when they were probably lied to like the unlucky investors in those companies (or would any of you like some of our Lehman Brothers stock?).
Me:  George, I'm sure that they were lied to.  There's no way that they weren't.  The question that I have (and one that I don't know how to answer) is how boards can pierce through any lies that their managers throw their way, especially when they assume that their managers are the good guys.  If you post another comment, I promise to have had coffee and won't accidentally delete it!

1 comment:

David Friedman said...

Great question. How can directors be equipped to detect lies and obfuscation? My experience was largely disheartening. Boards tended to react to stock prices and transparent problems after the toothpaste was out of the tube.

The boards that performed better pushed management proactively. In order to do this, they hired management consultants (good ones) with industry expertise to make them smarter. In fact, it was the best, highest-value use of consultants I have seen. The directors had sharp backgrounds but not enough time to get as deep as the consultants. But they were used to consuming consulting in their own businesses and knew how to use the services.

When you get deep in the bowels of a company, a lot of casual whistleblowers, contrarians, and gadflies emerge to help out- if the consultants seek out and build such relationships. I was on a team that had to break the news to a board that a business unit that was pitched as a growth opportunity to Wall Street was mature and unprofitable by conventional accounting. When the board is sending the checks to the consultants and not management, the incentives are purer to expose this stuff.

(Of course, when the consultants are engaged to help management explain themselves to the board, that's sometimes a big problem.)

Not a cure-all, nor perfect, but a thought from a guy who thinks more about contract theory these days than boards. Next time we cross paths, I'll tell you about my personal encounter with Enron. Too hot for a blog comment!