How does Enron affect corporate life? Stephen B Young, Global Executive Director of the Caux Round Table, which campaigns for ethical and social responsibility in business, ponders the lessons from the collapse of Enron - In My View - Caux Round Table

For A Change, Feb-March, 2003 by Stephen B. Young

The Caux Round Table (CRT) states in its Principles for Business (published in 1994) that corporations and businesses are a moral good for society. Their value is more material than spiritual; in Christian and Buddhist vocabulary they are `of this world'; their function is to create wealth through the use of capital, labour and scientific achievement.

But what can be said and done when corporate leadership destroys wealth, as in the case of Enron, WorldCom, Global Crossings? Or when other Wail Street firms create and sustain a bubble in the stock market with false valuations and misleading recommendations?

People abuse corporate power just as they abuse political power. Some people even abuse power within churches--not to mention within families with supposedly loved ones.

What can be done in the realm of corporate power is to erect checks against the abuse of power. There are three barriers holding off abuse: legal regulation, market incentives and moral character.

Market incentives work best. People are more likely to respond to incentives and disincentives, to self-interest--over the long run and day-in, day-out--than they are to live by high ideals.

But markets are responsive mechanisms. They are intermediaries among people and have no power on their own to direct events. Markets play off opportunities, based on knowledge and intuition. Secrecy and silence can manipulate markets. This is the big lesson of Enron. The company's top management found ways to hide the truth from the markets. When the truth came out, the market put Enron where it belonged--in bankruptcy as a company unable to make a legitimate profit.

And when the truth came out, the accounting firm of Arthur Andersen was also destroyed by market forces as clients ceased to seek its services.

Market incentives must feed on truth in order to work properly. Moral character, a personal commitment to integrity, should play a greater role here.

Since the rise of the counter-culture in the late 1960s, moral character has become an offensive concept. Character runs afoul of the individual's need for self-expression and self-gratification. Character, we are now told, is social and cultural repression; it is the basis for injustice and the hegemony of ruling elites, like the Victorian imperialists who were racist, sexist, and victimized colonial peoples.

Modern culture has become the kingdom of relativity, where there are no standards and no truth. In Cole Porter's words, `anything goes'.

In this culture, nothing inhibits the creation of accounting conventions. If there is no truth, and all is in the mind of the believer, why not present Enron's financial condition as you want others to see it? Make an argument and get away with it--that became the code by which many American corporations were managed in the 1990s.

One solution is to ask for moral character once again. That is one approach offered by the CRT in its Principles for Business.

A second approach proposed by the CRT is to get out more facts. Facts can deflate pretensions very quickly. We believe that the mechanism for this fact-finding should be the corporation's board of directors supervising management. Responsible board action could have prevented all the recent corporate scandals.

The CRT is pioneering a new tool for boards to use in getting reports on the degree of social responsibility demonstrated by their company managers. When the board is fully informed, it has incentives to act strategically and position the company, not for failure but for success.