It is easy to view the recent indictment and arrest of former Enron Chairman and CEO Kenneth Lay with a degree of satisfaction.
Executives of the now-bankrupt Enron have been accused of hiding billions of dollars in debt and embellishing company financial statements with complicated off-the-books transactions. Its collapse hurt thousands of employees and investors.
Lay himself was indicted on 11 counts, including conspiracy, wire fraud, securities fraud, bank fraud and making false statements to banks.
(Lay also seems to have wanted very badly to be a political player. He cultivated both Bushes, and saw to it that Enron gave lavishly to both parties — about $2 million to the GOP and around $1 million to the Democrats when the Clinton administration was in power.)
But even corporate malefactors deserve the presumption of innocence, and there are aspects of the case against Lay that are potentially troubling.
William Niskanen, president of the Cato Institute and former chief economist for Ford Motor Co, said his concern is that Lay could be convicted based on a “should have known” standard rather than on solid evidence that he directed, knew about or turned a tolerant blind eye to financial chicanery at Enron.
“A CEO is ultimately responsible for what happens on his watch, but no leader of a large organization can know everything that goes on,” Niskanen said. “If he was culpable, I have no problem with him going to jail. But if he is convicted because he should have known but didn’t, then corporate executives and leaders of large organizations throughout the country will have to operate more defensively and less imaginatively.”
Niskanen said to keep the Enron scandal in context. There are about 17,000 public companies in the United States and perhaps 30 have been charged with serious malfeasance.
It is also worth noting that the marketplace began to identify Enron’s problems and punish it (through drastically falling stock prices that led to bankruptcy) before the government regulators figured anything out or began to act. This indictment of Lay came some 2 1/2 years after Enron had essentially collapsed due to investors losing confidence.
Kenneth Lay’s trial, likely to drag on, will be fascinating and will, we hope, deliver some measure of justice to those hurt by the Enron collapse should the charges against him be proved.
But we should avoid the temptation to read too much into it. This trial will neither prove that corporations are inherently corrupt nor fix the real problems that exist in corporate governance.